-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VJnr9vY+FAVpW0uGs/32DlMcnVFbGRjcVJAHTYJc23a9i1VJkZ8+QMNBucedzoB/ nIsH+xr1L/vxzmUC+xOYow== 0001095811-00-000842.txt : 20000331 0001095811-00-000842.hdr.sgml : 20000331 ACCESSION NUMBER: 0001095811-00-000842 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIZETTO GROUP INC CENTRAL INDEX KEY: 0001092458 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 330761159 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27501 FILM NUMBER: 588023 BUSINESS ADDRESS: STREET 1: 567 NICHOLAS DRIVE SUITE 360 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9497192200 FORMER COMPANY: FORMER CONFORMED NAME: TRIZETTA GROUP INC DATE OF NAME CHANGE: 19990803 10-K405 1 FORM 10-K405 PERIOD END DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-27501 THE TRIZETTO GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0761159 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
567 SAN NICOLAS DRIVE, SUITE 360 NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 719-2200 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.001 PAR VALUE ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 29, 2000, 21,185,407 shares of common stock were outstanding and the aggregate market value of such common stock held by non-affiliates (based upon the closing price as reported by the Nasdaq National Market) was approximately $848.4 million. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORM 10-K For the Fiscal Year Ended December 31, 1999 INDEX
PAGE ---- PART I Item 1 Business.................................................... 2 Item 2 Properties.................................................. 22 Item 3 Legal Proceedings........................................... 22 Item 4 Submission of Matters to a Vote of Security Holders......... 22 PART II Market for Registrant's Common Equity and Related Item 5 Stockholder Matters......................................... 23 Item 6 Selected Financial Data..................................... 26 Management's Discussion and Analysis of Financial Condition Item 7 and Results of Operations................................... 28 Quantitative and Qualitative Disclosures About Market Item 7A Risk........................................................ 36 Item 8 Financial Statements and Supplementary Data................. 36 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 36 PART III Item 10 Directors and Executive Officers of the Registrant.......... 37 Item 11 Executive Compensation...................................... 40 Security Ownership of Certain Beneficial Owners and Item 12 Management.................................................. 45 Item 13 Certain Relationships and Related Transactions.............. 46 PART IV Exhibits, Financial Statement Schedules and Reports on Form Item 14 8-K......................................................... 48 SIGNATURES........................................................... 53
1 3 PART I THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "FORECASTS", "EXPECTS", "PLANS", "ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", "POTENTIAL", OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED BELOW UNDER THE CAPTION "RISK FACTORS." THESE FACTORS MAY CAUSE OUR ACTUAL EVENTS TO DIFFER MATERIALLY FROM ANY FORWARD- LOOKING STATEMENT. WE DO NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT. ITEM 1 -- BUSINESS COMPANY OVERVIEW We enable electronic business for the healthcare industry as a software application services provider and a healthcare Internet portal, supported by our transformation services unit, which provides professional consulting services. By combining hosted software applications with the Internet, we provide a complete technology solution for our customers in the healthcare industry. Our customers primarily include healthcare provider groups, physician practice management companies and managed care organizations such as health maintenance organizations, preferred provider organizations and third party administrators. By offering our software and services on a hosted basis, we are able to provide our customers with comprehensive and cost predictable services with guaranteed service quality, typically through multi-year contracts. By supplying and managing our customers' information technology environments, we eliminate their need to manage and support their own computer systems, networks and software, thus allowing them to concentrate on their primary business. We are a leading provider of remotely hosted third party packaged and proprietary software applications and related services for use in the healthcare industry. Through our Customer Connectivity Centers, we remotely operate and maintain applications for our customers on most of the widely used computing, networking and operating platforms. We provide access to our hosted applications either across the Internet or across traditional networks. Our proprietary solutions and methods enable our customers to access our hosted applications using leading internet browsers. We have acquired rights to license and/or deploy numerous commercially available software applications from a variety of healthcare software vendors, including Epic Systems, Inc., Medic Computer Systems, Inc., Medical Manager Corporation, Raintree Systems, Inc., InfoMedtrics, Inc., CTR Business Systems, Inc., McKesson HBOC, Inc., Penchart, and QCSI. HealthWeb, our branded healthcare business to business Internet portal and e-Business Applications, is currently being used by providers and a number of payors, is designed to facilitate the exchange of information and to enable e-commerce among all constituents of the healthcare industry. HealthWeb is also designed to integrate and deliver the software applications that we host for our customers though an easy-to-use common Internet browser interface. We are promoting our HealthWeb brand in order to establish its reputation as a leading healthcare e-commerce portal. HealthWeb is architected to specifically address the requirements of individual users that we expect will include most types of healthcare professionals and administrative staff. Currently, providers use HealthWeb for day to day office administration activities, access to health plans and communications with patients. Currently, payors use HealthWeb for information exchange with providers and members. We are working on the development of additional features and functionality that will be offered in 2000 and deployed as developed. Our Transformation Services Group helps our customers become more efficient in applying and using their information technology. We use our proprietary methodologies to identify information technology solutions that are suitable for our customers. In many cases, these solutions include software applications hosted in our Customer Connectivity Centers as well as our HealthWeb portal and e-applications. Our Transformation Services Group implements selected solutions for which we provide ongoing application services and support. 2 4 Our senior management team averages approximately 14 years of healthcare industry experience. In addition, many members of our board of directors and management team have been responsible for comprehensive execution of information technology functions at leading healthcare entities representing millions of covered-lives and thousands of physicians. Our comprehensive understanding of healthcare business processes, and our experience in the use and delivery of information technologies, enables us to deliver reliable complex hosted software applications and information technology services while maintaining customer satisfaction. As of December 31, 1999, we served approximately 129 customers in over 400 sites located throughout the United States. These customers represent over 250,000 healthcare providers and make their services available to over 40 million individuals. RECENT DEVELOPMENTS On March 28, 2000, we entered into an Agreement and Plan of Reorganization with IMS Health Incorporated, a Delaware corporation, under which IMS will merge with and into us. At the closing, we will issue .4655 shares of our common stock for each share of outstanding common stock of IMS. On the date of signing, the transaction was valued at approximately $8.6 billion. Consummation of the merger is subject to the approval of each company's stockholders as well as various third parties and federal agencies. On January 11, 2000, we acquired Healthcare Media Enterprises, Inc., a software development business which focuses on web design and business to business portals. The purchase price of approximately $5.8 million consisted of approximately $1.6 million cash and 87,359 shares of our common stock. OUR SOLUTIONS Our solutions are capable of providing our customers with a complete, professionally managed information technology system that includes end-to-end desktop and network connections, primary software applications that help run their day-to-day business, and information access and reporting capabilities to aid in data analysis and decision support. Our solutions allow our customers to integrate different applications and technologies, manage risk and control costs. Our solutions, further enable our customers to take advantage of the high speed, universal access and ease of use of the Internet. Our products and services provide our customers with the following benefits: - RAPID DEPLOYMENT AND FLEXIBILITY. By offering hosted software applications that are typically already installed in our Customer Connectivity Center, we are able to rapidly deploy solutions for our customers. Most competing solutions require customers to purchase and install complex and costly desktop, application and networking systems, as well as load and test application software. This conventional approach can be a highly time-consuming process. Rapid deployment of our products and services is intended to allow customers to realize very rapid returns on their information technology expenditures. We offer our customers a large variety of widely used proprietary and non-proprietary software applications without bias to any particular vendor's products, allowing us to configure unique solutions tailored to each customer's needs. - REASONABLE, PREDICTABLE COSTS. Our hosted software applications and electronic communication infrastructure services are subscription-based, and are billed monthly over the course of contracts that are generally three to five years in length. The amount paid is based on easily measurable and predictable units of volume such as number of physicians or number of members. Most competitive software and systems sales require customers to budget and incur significant capital expenditures to acquire hardware, operating systems and application software, integration consulting, communication services and training. In addition, customers using in-house solutions are often required to purchase separate ongoing maintenance contracts for all hardware and software, while also incurring unpredictable costs for equipment repairs and upgrades. In contrast, our solutions are typically allocated to operating rather than capital budgets, allowing customers to receive a specified suite of services at a predetermined monthly cost. Our solutions thereby afford customers predictable costs that are consistent with their recognition of revenue. 3 5 - RELIABILITY AND SCALABILITY. We operate our Customer Connectivity Centers on behalf of our customers on a 24 hours a day, seven days a week basis and we employ an information technology management team and staff of over 300 people who are experienced in high-volume production healthcare environments. For many of our customers, the creation and maintenance of a complete, professionally managed information technology system is cost prohibitive. Our solutions and approach bring the benefits enjoyed by the largest healthcare organizations to the remaining majority of healthcare entities. Our centralized Customer Connectivity Centers allow us to rapidly expand our capacity as customer demands increase. - LOWER IMPLEMENTATION RISK. In addition to employing a team experienced in operating and supporting applications on a day-to-day basis, we employ approximately 200 professionals who are skilled in implementing, integrating, transforming and testing software applications using our proven methods. These methods have been learned and refined from our extensive experience in systems integration. - EASE OF COMMUNICATION AND CONNECTIVITY. We engineer desktop, networking and communication solutions that enable our customers to run modern and legacy applications from a single desktop device, across a common networking environment. Many of our customers do not employ technology professionals experienced in the setup and networking of modern end-user devices like personal computers, network computers and personal digital assistants. We maintain a laboratory to continuously engineer and test third party end-user devices, network servers and application servers, along with desktop and network software releases, to ensure reliable access to and connection with required data and applications. - INTERNET ACCESS. Our customers are continuously connected to our Customer Connectivity Centers via high-speed, high-bandwidth electronic communications channels. This enables us to conveniently provide fast and continuous Internet access to each connected desktop that utilizes our Internet browser-based HealthWeb portal over that same communications channel. Because our Customer Connectivity Centers maintain secure high-speed connections to the Internet, we can offer our customers access to informational and commercial transactions on a business-to-business and business-to-person basis. - PRESERVATION OF EXISTING INVESTMENT IN LEGACY SYSTEMS. Our solutions allow for the integration of different legacy systems and make such systems more accessible to more users through common browser-based user interfaces. Our solutions therefore allow customers to continue, and in many cases enhance, the use of installed systems rather than replacing them with costly new systems. This benefit is particularly attractive to healthcare entities with significant capital already committed to legacy information technology systems and lack the resources to commit incremental capital. - HEALTHCARE AND MANAGED CARE INDUSTRY EXPERTISE. Healthcare software applications and their associated transactions and business processes tend to be complex. Our operational management team is highly experienced in implementing and efficiently operating the information technology and business functions necessary to allow our customers to be competitive in today's dynamic healthcare industry. OUR PRODUCTS AND SERVICES APPLICATION SERVICES PROVIDER Our application services represent a subscription-based method for customers to access all or any of the three required information technology components (primary software applications, information access and reporting and electronic communications infrastructure), along with supporting business services. Our customers choose a combination of our product and service offerings that best meet their business requirements, technical needs and pricing requirements, and pay for the delivery of those services on a monthly basis. Our software applications and information technology services provide our customers with a simpler alternative as compared to the creation and on-going operation of an in-house information technology function. Customers may use our applications and services for all or a portion of their information technology and related business service needs. We expect to expand our product and service offerings as we continue to develop relationships with additional software application vendors and information technology service partners. The following chart depicts 4 6 our current software applications and services offered on an application services basis, or in some cases pursuant to a license agreement, classified by the primary information technology component that is being delivered. Our licenses for the use of the third party software applications that are included in the following chart are essential to the technology solutions we provide for our customers. The material licenses we currently rely upon vary in duration. Our Medic license is perpetual, subject to prospective termination in the event of a material breach. Our Medical Manager and Great Plains licenses are perpetual unless and until terminated by either party with proper notice. Although the initial three-year term of our Epic license expires on April 30, 2002, the license then becomes automatically renewable for one-year terms. The Epic license may be prospectively terminated during any renewal term with 150 days notice prior to the end of the renewable term. We believe that the durational terms of our software licenses are adequate for our current users of these software applications and that additional licenses can be obtained if needed. 5 7 CURRENT OFFERINGS - ------------------------------------------------------------------------------------------ PRODUCT/VENDOR KEY FUNCTIONS DELIVERED - ------------------------------------------------------------------------------------------ ELECTRONIC COMMUNICATIONS INFRASTRUCTURE - ------------------------------------------------------------------------------------------ Access Manager A combination of hardware and software that allows the customer to access and use numerous software applications. Exchange Manager Provides an interface that effectively translates data from different software applications and enables them to communicate electronically. HealthWeb Enablement Provides the customer with an Internet browser-based overlay on software applications which gives the customer ease of use through point and click capabilities. - ------------------------------------------------------------------------------------------ PRIMARY APPLICATIONS AND SERVICES - ------------------------------------------------------------------------------------------ PROVIDER APPLICATIONS Enterprise Manager Software application that facilitates appointment scheduling, patient registration, visitation tracking, insurance processing, patient bill processing and includes a financial accounting module. Epic (various) Multiple software applications related to physician practice management and financial control, including scheduling, collection of co-payments, tracking of referrals and eligibility, billing and collections, medical records, claims adjudication, accounting and others. + Medic A practice management system that provides a solution for physicians and group practices. It includes software applications that automate and integrate financial, administrative, claims processing and electronic medical records functions. Medical Manager Fully integrated physician practice management solution which offers support for financial, administrative and clinical needs of physician groups and other providers. Raintree Systems Software application that provides practice management solutions including appointment scheduling, registration, accounts receivable, management and reporting. Application is customizable according to provider's specialty. PenChart Suite Application tool set provides medium and large ambulatory care facilities with an electronic patient record, enabling rapid data entry by clinicians on hand-held wireless tablet computers, with documentation of all aspects of patient encounters, including patient visits, lab results, X-rays, consult notes and prescriptions. - ------------------------------------------------------------------------------------------ PROVIDER BUSINESS SERVICES Billing & Collections Through personnel located in our facilities, we perform billing and collection functions on an outsourced basis. Claims Review Through personnel located in our facilities, we reconcile capitation payments from insurance companies to medical groups and review claims paid for appropriateness and contract terms on an outsourced basis. - ------------------------------------------------------------------------------------------ PAYOR APPLICATIONS aQDEN(TM) Software application that facilitates relationship management between the dental plan, its members, and the dental providers which manages every line of business in dental care. Features include member management, claims processing, referrals and more. Epic Tapestry Software application that automates the fundamental operations of managed care by providing the following capabilities: enrollment, eligibility, membership management, benefits tracking and inquiry, customer service, referral authorization, provider credentialing, case management and others. HBOC Amisys A solution that addresses the information management needs of payor- and provider-based organizations that have assumed the financial risk for delivery of healthcare services. This application automates the critical business functions necessary to operate or administer a variety of managed care products. HBOC Claimcheck A comprehensive auditing software system that automatically edits and corrects billing errors to ensure claims are paid appropriately. HBOC Code Review An auditing tool which detects, corrects and documents improper coding of claims by applying the American Medical Association's code criteria to all physician services. Health Claims Processing Software application that includes benefit plan System administration, enrollment and eligibility, provider contracting, utilization/case management, claims processing, billing and accounts receivable, and customer service. MedEVENT(R) System that supports provider or payer initiated medical management activities including: referral, utilization and case management, health management program tracking, health risk assessment, cost savings analysis, time tracking, quality improvement process, medical review tracking and production data aggregation and reporting. - ------------------------------------------------------------------------------------------
6 8 CURRENT OFFERINGS - ------------------------------------------------------------------------------------------ PRODUCT/VENDOR KEY FUNCTIONS DELIVERED - ------------------------------------------------------------------------------------------ PAYOR APPLICATIONS (CONT'D) - ------------------------------------------------------------------------------------------ NCMS(R) A software application that manages the development, credentialing and ongoing maintenance of provider networks. Features automated credentialing processes, maintenance of expired documents, verification coding, provider templates, scoring, facility credentialing, provider profiles, delegated audit tracking and committee attendance and activity. Plan Manager Software application that includes benefit plan administration, enrollment and eligibility, provider contracting, utilization/case management, claims processing, billing and accounts receivable, customer service, accounting and finance functions. PulseHEDIS Software application that produces reports for all administrative measures included in the 2000 HEDIS specifications. Includes plan-specific setup, import and translation and data analysis support. Streamlines reporting and provides support for successful audit completion. QMACS(R) Software application designed to administer all lines of medical business-Indemnity, PPO and HMO. It facilitates relationship management between the plan, its members, and the medical providers. This includes, but is not limited to, managing complex benefit plans and provider contracts, referrals, utilization management, claims adjudication and payment, call tracking and financial reporting. - ------------------------------------------------------------------------------------------ ADMINISTRATIVE APPLICATIONS CIO Workbench A software application that helps manage and prioritize information services projects. Great Plains General accounting and financial package designed for small to medium size businesses. SAP General accounting and financial package designed for medium to large size businesses. - ------------------------------------------------------------------------------------------ INFORMATION ACCESS & REPORTING - ------------------------------------------------------------------------------------------ DATA MANAGEMENT Data Manager A data warehousing program that collects and manages data from different sources. Healthcare Information A data repository which merges all financial, clinical and Center (TM) administrative data across lines of insurance and risk. Facilitates the control of healthcare and disability costs, risks, contract agreements and potential liabilities. MedSTOR(R) A data warehouse application which produces standardized and ad hoc reports that allow for in depth analysis of a client's business. - ------------------------------------------------------------------------------------------
7 9 HEALTHWEB INTERNET PORTAL HealthWeb, our healthcare Internet portal and E-Business Applications, is currently being used by providers and a number of payors. HealthWeb serves as a gateway for the exchange of healthcare information and services across the Internet. HealthWeb is designed to enhance single-point desktop access to a variety of application and information resources required to run a healthcare entity. HealthWeb is architecturally designed primarily for use by administrative support personnel who conduct the day-to-day business and clinical operations of healthcare entities. These personnel represent the vast majority of employees in healthcare entities. After contracting with a new customer, members of our Transformation Services Group install HealthWeb on the user's computer desktop and customize it per the user's specific requests. The user can choose to have HealthWeb as its default screen that appears when the computer is turned on or if the user continues using its own default screen, HealthWeb appears as an icon that will be activated when the icon is pointed and clicked. Once activated, HealthWeb provides the user with a single screen view of the software applications and information needed to perform daily tasks. When using HealthWeb, the user sees various "point and click" choices on the screen grouped under specific categories. For example, providers see categories such as "Services," "Resources," "Facilities" and "Payors." Under "Services," the provider can click a button labeled "Practice Management System" which opens software applications such as Epic or Medic, and allows the user to make appointments, process claims or review other administrative data. Under "Resources," the provider can click a button labeled "Medical Journals" which would take the user to an Internet site containing medical information. Under "Facilities," the provider can click a button labeled "Hospitals" which would produce a list of the hospitals, including phone numbers or directions, which can be distributed to a patient. Under "Payors," the user can click a button that contains the names of insurance carriers. This would link the provider to the insurance carrier's systems over the Internet, which would allow the provider to verify eligibility, benefits, referrals, claim status and other information, as well as messaging with the health plan. HealthWeb is designed to work with legacy healthcare applications which do not have "point and click" view screens. We provide our users "point and click" connection to software applications, whether they operate on new or legacy platforms, using any standard Internet browser. We believe that the abandonment of legacy systems will generally not serve the best interests of our customers, especially in light of significant capital outlays customers have recently made in addressing the Year 2000 issues. HealthWeb's proprietary enabling technology to access and connect to these legacy systems allows us to maximize value to our customers while minimizing risks of business interruption. HealthWeb also allows customers unlimited Internet access to other healthcare trading partners such as pharmacy and supply companies, to other healthcare entities, to online healthcare data and information content services, to healthcare organizations and associations, to education and training resources and to individuals. For those customers who utilize our software applications and information technology services, HealthWeb is designed to be the primary access method to receive those services. For customers who do not utilize our applications and services, HealthWeb is designed to co-exist with their existing software applications and technology environments. We plan that the number of offerings available through our HealthWeb healthcare Internet portal will grow, as we continue to develop relationships with additional Internet-capable service and content partners. TRANSFORMATION SERVICES GROUP Our Transformation Services Group consists of approximately 84 individuals who are available to communicate with our customers on a daily basis to ensure that our customers' information technology systems correspond with their strategic business objectives. Our professional services personnel consult with our customers from our office or work directly with them at their own facilities. Our non-recurring engagements may range from several days to many months. Our services are either billed on a time and materials basis or upon a fixed rate negotiated for a specific project. 8 10 We hire and develop professional services personnel from across the nation to provide non-recurring services to our customers in the major population centers of the United States, as well as to ensure that we have expertise in each of the major segments of the healthcare industry. We anticipate that the number of professional services personnel that we employ, and the number of geographic office locations that we maintain will continue to grow as we expand our Transformation Services Group. Since we actively recruit qualified information technology professionals from the healthcare industry, our professional services personnel provide a depth of knowledge and experience specifically focused to address our customers' business and technology needs. The following chart describes the types of professional services we provide. TRANSFORMATION SERVICES TYPE Description - -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY ASSESSMENT AND STRATEGY SERVICES We help our customers effectively use information technology by analyzing their business strategies, technical competence, business management processes and abilities to support existing information technology. Based upon the results of our analysis, we help our clients understand their existing level of information technology capability and provide direction to help them achieve competitive advantage by managing their information and data electronically. - -------------------------------------------------------------------------------- VIO(SM) -- VIRTUAL INFORMATION OFFICER SERVICES We provide executive-level information technology professionals for our customers who either do not employ their own information technology management or wish to supplement it. Drawing upon our consultants' considerable experience and depth of knowledge, we provide information technology management services with a greater breadth of expertise than our customers can achieve using their own management resources. These services include the use of our CIO Workbench(SM) products, a collection of our proven information technology management tools and techniques. - -------------------------------------------------------------------------------- INTEGRATION CONSULTING SERVICES We help our customers install and implement software applications and technology products. Based upon years of project experience, we provide integration non-recurring services that include systems planning, analysis, selection, design, construction, implementation, data conversion, testing, business process development, training development and delivery and systems support. This helps our customers succeed in implementing difficult systems projects. - -------------------------------------------------------------------------------- STAFFING SERVICES We provide temporary staffing for customers who lack qualified information technology personnel. By utilizing both our own professional services personnel and a national network of contracted, technical specialists, we provide access to specialized technical personnel on both short-term and long-term basis. Personnel placement services are also available through a variety of fee arrangements. - -------------------------------------------------------------------------------- E-COMMERCE SOLUTIONS SERVICES We assist our customers in developing, deploying and maintaining customized e-commerce applications. Services include systems planning, analysis, design, construction, implementation, data conversion, testing, business process development, training development and delivery and systems support. 9 11 SALES AND MARKETING We take a consultative approach to selling our services. Our Transformation Services Group, consisting of approximately 84 members, is trained in a proprietary assessment methodology that allows them to quickly and comprehensively analyze our customers' information technology capabilities and requirements. In conjunction with their consulting responsibilities, our Transformation Services Group identifies opportunities to introduce our customers to the broad range of applications and technology solutions available to them. In many cases, these will include applications hosted in our Customer Connectivity Centers as well as HealthWeb and Exchange Manager. Our 15 person professional sales force, which is led by a veteran healthcare executive, uses traditional marketing, lead generation and customer qualification techniques to directly sell our hosted products and services to prospective and existing customers. This sales force concentrates specifically on solutions for provider and payor organizations. Our marketing and business development organization focuses on building our corporate brands, including our software applications and information technology services and our healthcare Internet portal. This organization is also responsible for developing and refining our business strategies. In addition, our marketing and business development organization is responsible for the following programs: - LEAD GENERATION PROGRAM. This program identifies and qualifies prospective customers through seminars, telemarketing, audio and web casting, direct mail and annual conferences. - INDUSTRY MARKETING AND BRAND DEVELOPMENT PROGRAM. This program includes participation in and sponsorship of industry tradeshows and trade media advertising. - STRATEGIC BUSINESS ALLIANCES PROGRAM. This program initiates and develops strategic partnerships to implement co-branding, cooperative marketing and distribution relationships. CUSTOMER SERVICE We believe that a high level of support is necessary to maintain long-term relationships with our customers. Our service desk staff provides a wide range of customer support functions. Our customers may contact the service desk via a toll-free number 24 hours a day, seven days a week. The account manager assigned to each of our customers is responsible for proactively monitoring customer satisfaction, exposing customers to additional training and process-improvement opportunities and coordinating issue resolution. We employ functional and technical support personnel who work directly with our account management team and customers to resolve technical, operational and application problems or questions. Because we support multiple applications and technology solutions, our functional and technical support staff are grouped and trained by specific application and by application type. These focused staff groups have concentrated expertise that we can deploy as needed to address customer needs. We cross-train employees to support multiple application solutions to create economies-of-scale in our support staff. We further leverage the capabilities of our support staff through the use of sophisticated computer software that keeps track of solutions to common computer and software-related problems. This allows our support staff to learn from the experience of other people within the organization and it reduces the time it takes to solve problems. We have implemented Remedy, a third party software application for tracking the status, and subsequent resolution, of problems that have been reported to our help desk. This allows us to cost-effectively distribute our knowledge base of application problem resolutions to employees and customers. All changes to computer software are coordinated centrally and new versions of software, containing updates and enhancements are released on a regular basis with strict testing and controls. This ensures that the new software functions correctly in the customer's environment. As of December 31, 1999, we had approximately 225 employees and independent contractors providing technical support functions for our customers. In addition, we provide business services support for our customers in the areas of claims processing, billing and enrollment, membership services, provider contracting and provider credential verification services. As of December 31, 1999, we had approximately 180 employees and independent contractors providing such support services. 10 12 VENDOR PARTNER RELATIONSHIPS We maintain relationships with a large and increasing number of software vendors in the healthcare information technology market. These relationships range from perpetual, reusable software licenses and contracts to preferred installer agreements to informal co-marketing arrangements. We enter into relationships with software vendors in order to be able to offer our customers the widest possible variety of solutions tailored to their unique information technology needs. Our relationships with our vendor partners are designed to provide both parties with numerous mutual benefits. The benefits for our vendor partners include: - web-enablement of their products; - professional installation and operation of their products; - ease of integration with other third party products and services; - easier software version control; - easier add-on product capability; - lower implementation risk; - enhanced distribution channels; - shorter sales cycle; - lower maintenance and support costs; and - potentially higher margins. The benefits for us include: - access to market leading products and technology solutions; - ability to focus on service delivery rather than software development; - co-marketing with industry leading brands; - enhanced distribution channels; and - competitive pricing. We are committed to delivering cost-predictable proven solutions to our customers. We evaluate and recommend applications or technologies that most closely match the business requirements, technical needs and price requirements of our customers. We are capable of hosting the leading commercially available healthcare applications on a broad range of operating platforms, and we are able to deploy these applications as required by our customers. Some of our healthcare vendor partners include: - Epic Systems, Inc.; - Medic Computer Systems, Inc.; - Quality Care Solutions, Inc.; - Raintree Systems, Inc.; - CTR Business Systems, Inc.; and - InfoMedtrics, Inc. - McKesson HBOC, Inc. 11 13 COMPETITION The market for healthcare information services is intensely competitive, rapidly evolving, highly fragmented and subject to rapid technological change. By using proprietary technologies and methodologies, we integrate and deliver packaged software applications, Internet connections, electronic communication infrastructure and information technology consulting services. Our competitors provide some or all of the services that we provide. Our competitors can be categorized as follows: - application services providers, such as USinternetworking, Inc. and Exodus Communications, Inc.; - healthcare e-commerce and portal companies, such as Healtheon/WebMD Corporation and CareInsite, Inc.; - information technology outsourcing companies, such as Perot Systems Corporation, Computer Sciences Corporation and Electronic Data Systems Corporation; - information technology consulting firms, such as Superior Consultant Holdings Corporation, First Consulting Group, Inc. and the consulting divisions of the major accounting firms; and - healthcare information software vendors selling products, such as IDX Systems Corporation, McKesson HBOC, Inc., and Cerner Corporation. Each of these types of companies can be expected to compete with us within various segments of the healthcare information technology market. Furthermore, major software information systems companies and other entities, including those specializing in the healthcare industry that are not presently offering applications that compete with our products and services, may enter our markets. In addition, some of our third party software vendors with whom we have licensing agreements may compete with us from time to time by selling software on a stand-alone basis. We believe companies in our industry primarily compete based on performance, price, software functionality, customer awareness, ease of implementation and level of service. Although our position in the market as compared to our competitors is difficult to characterize due principally to the variety of current and potential competitors and the evolving nature of our market, we believe that we presently compete favorably with respect to all of these factors. While our competition comes from many industry segments, we believe no single segment offers the integrated, single-source solution that we provide to our customers. To be competitive, we must continue to enhance our products and services, as well as our sales, marketing and distribution channels to respond promptly and effectively to: - changes in the healthcare industry; - constantly evolving standards affecting healthcare transactions; - the challenges of technological innovation and adoption; - evolving business practices of our customers; - our competitors' new products and services; - new products and services developed by our vendor partners and suppliers; and - challenges in hiring and retaining information technology professionals. INTELLECTUAL PROPERTY Our intellectual property is important to our business. We rely on certain developed software assets and internal methodologies for performing customer services. Our Transformation Services Group develops and utilizes information technology life-cycle methodology and related paper-based and software-based toolsets to perform customer assessments, planning, design, development, implementation and support services. We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property. We have no patented technology. 12 14 Our efforts to protect our intellectual property may not be adequate. Our competitors may independently develop similar technology or duplicate our products or services. Unauthorized parties may infringe upon or misappropriate our products, services or proprietary information. In addition, the laws of some foreign countries do not protect proprietary rights as well as the laws of the United States. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be time-consuming and costly. We could be subject to intellectual property infringement claims as we expand our product and service offerings and the number of our competitors increases. Defending against these claims, even if not meritorious, could be expensive and divert our attention from operating our company. If we become liable to third parties for infringing upon their intellectual property rights, we could be required to pay a substantial damage award and be forced to develop noninfringing technology, obtain a license or cease using the applications that contain the infringing technology or content. We may be unable to develop noninfringing technology or content or obtain a license on commercially reasonable terms, or at all. We also rely on a variety of technologies that are licensed from third parties to perform key functions. These third party licenses are an essential element of our business as an application services provider. These third party licenses may not be available to us on commercially reasonable terms in the future. The loss of or inability to maintain any of these licenses could delay the introduction of software enhancements and other features until equivalent technology can be licensed or developed. Any such delay could materially adversely affect our ability to attract and retain customers. TECHNOLOGY We operate Customer Connectivity Centers in Englewood, Colorado, Birmingham, Alabama, and Albany, New York. Each center operates with state-of-the-art environmental protection systems to maintain high availability to host systems and wide area network access. Connection to our host application servers and services is provided using the industry-standard TCP/IP protocol. We believe this provides the most efficient and cost-effective transport for information systems services, as well as simplified support and management. Our network connectivity infrastructure eliminates our customers' need to manage and support their own computer systems, network and software. We provide active management for all infrastructure components and server platforms from our Customer Connectivity Center in Englewood, Colorado. GOVERNMENT REGULATION INTERNET REGULATION. There are increasing numbers of laws and regulations pertaining to the Internet. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, on-line content regulation, user privacy, taxation and quality of products and services. Moreover, it may take years to determine whether and how existing laws such as those governing issues such as intellectual property ownership and infringement, privacy, libel, copyright, trademark, trade secret, obscenity, personal privacy, taxation, regulation of professional services, regulation of medical devices and the regulation of the sale of other specified goods and services apply to the Internet and Internet advertising. The requirement that we comply with any new legislation or regulation, or any unanticipated application or interpretation of existing laws, may decrease the growth in the use of the Internet, which could in turn decrease the demand for our service, increase our cost of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. INTERNET TAXATION. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet and certain states have taken measures to tax Internet-related activities. Although in October 1998 Congress placed a three-year moratorium on state and local taxes on Internet access or on discriminatory taxes on electronic commerce, existing state or local laws were expressly excepted from this moratorium. Once this moratorium is lifted, some type of federal and/or state taxes may be imposed upon Internet commerce. Such legislation or other attempts at regulating commerce over the Internet may substantially impair the growth of 13 15 commerce on the Internet and, as a result, adversely affect our opportunity to derive financial benefit from such activities. PRIVACY CONCERNS. The confidentiality of patient records and the circumstances under which records may be released for inclusion in the databases we host are subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of this information to implement security measures that may require substantial expenditures by us. For example, the proposed Health Information Modernization and Security Act would establish standards and requirements for the electronic transmission of health information. There can be no assurance that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using our applications. FEDERAL AND STATE HEALTHCARE REGULATION. Our software applications, information technology services and healthcare Internet portal are designed to function within the current healthcare financing and reimbursement system. During the past several years, the healthcare industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and certain capital expenditures. In addition, proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for our customers. As in the past, healthcare organizations may react to these proposals and the uncertainty surrounding such proposals in ways that could result in a reduction or deferral in the use of our technologies and services. We cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on our business, financial condition or results of operations. We perform billing and claims services that are governed by numerous federal and state civil and criminal laws. The federal government in recent years has placed increased scrutiny on billing and collection practices of healthcare providers and related entities and particularly on potential fraudulent billing practices such as submissions of inflated claims for payment and upcoding. Violations of the laws regarding billing and coding may lead to civil monetary penalties, criminal fines, imprisonment or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for us and our customers. Any of these results could have a material adverse impact on our business, financial condition or results of operations. Legislation currently being considered at the federal level could impact the manner in which we conduct our business. The Health Insurance Portability & Accountability Act (HIPAA) of 1996 mandates the use of standard transaction formats, codes sets, identifiers and privacy and security requirements. Publication of transaction standards is currently scheduled for June 2000 and compliance will be required by August 2002. Other regulations will be published in stages after June 2000. TriZetto must deliver HIPAA-compliant systems and our clients must be responsible for their overall HIPAA compliance. Our ability to provide HIPAA-compliant applications to our customers through the ASP model could relieve customers of significant application remediation requirements. This potentially represents a significant competitive advantage. Conversely, any failure to become HIPAA-compliant could negatively impact our competitive advantage and involve financial and/or criminal penalties. CONSUMER PROTECTION LAWS. In addition, federal and state consumer protection laws may apply to us when we bill patients directly for the cost of physician services provided. Failure to comply with any of these laws or regulations could result in a loss of licensure, or other fines and penalties. Any of these results could have a material adverse impact on our business, financial condition or results of operations. 14 16 RISK FACTORS BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE OUR BUSINESS. We were incorporated in May 1997 and had revenue of $2.5 million for the period from May 27, 1997 (date of inception) to December 31, 1997, $11.4 million for the year ended December 31, 1998 and $32.9 million for the year ended December 31, 1999. Accordingly, we have a limited operating history. Our stockholders must consider the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in rapidly evolving markets. These risks and difficulties include our ability to: - respond effectively to the offerings of competitive providers of healthcare information technology and services; - increase awareness and market penetration of our brand; - maintain our existing, and develop new, affiliate relationships; - continue to develop and upgrade our technology; and - attract, retain and motivate qualified personnel. We depend on the continued demand for outsourcing of health information technology services, on the growing use of the Internet for advertising, commerce and communication and on favorable general economic conditions. We cannot assure you that our business strategy will be successful or that we will successfully address these risks or difficulties. If we should fail to adequately address any of these risks or difficulties, our business would likely suffer. WE DEPEND ON OUR SOFTWARE APPLICATION VENDOR RELATIONSHIPS, AND IF OUR SOFTWARE APPLICATION VENDORS TERMINATE OR MODIFY EXISTING CONTRACTS OR EXPERIENCE BUSINESS DIFFICULTIES, OR IF WE ARE UNABLE TO ESTABLISH NEW RELATIONSHIPS WITH ADDITIONAL SOFTWARE APPLICATION VENDORS, IT COULD HARM OUR BUSINESS. We depend, and will continue to depend, on our licensing and business relationships with our third party software application vendors. Our success depends significantly on our ability to maintain our existing relationships with our vendors and to build new relationships with other vendors in order to enhance our services and application offerings and remain competitive. Although most of our licensing agreements are perpetual or automatically renewable, they are subject to termination in the event that we materially breach such agreements. We cannot assure you that we will be able to maintain relationships with our vendors or establish relationships with new vendors. Our customer satisfaction is also dependent upon the functional uses and reliability of the software, products and services of our application vendors. We cannot assure you that the software, products or services of our third party vendors will achieve market acceptance or commercial success. Accordingly, we cannot assure you that our existing relationships will result in sustained business partnerships, successful product or service offerings or the generation of significant revenues for us. Our arrangements with third party software application vendors are not exclusive. We cannot assure you that these third party vendors regard our relationships with them as important to their own respective businesses and operations. They may reassess their commitment to us at any time and may choose to develop or enhance their own competing distribution channels and product support services. If we do not maintain our existing relationships or if the economic terms of our business relationships change, we may not be able to license and offer these services and products on commercially reasonable terms or at all. Our inability to obtain any of these licenses could delay service development or timely introduction of new services and divert our resources. Any such delays could materially adversely affect our business, financial condition and operating results. There are a variety of additional reasons why our relationships with our software application vendors or our ability to establish relationships with additional vendors may be impaired. Vendors may experience business difficulties or enter into bankruptcy. Additionally, they may discontinue service and support of products that we currently offer to our customers. Our software application vendors may participate in industry consolidation that may impact the products they offer, their support services and their willingness to do business with us. 15 17 OUR BUSINESS IS CHANGING RAPIDLY, WHICH COULD CAUSE OUR QUARTERLY OPERATING RESULTS TO VARY AND OUR STOCK PRICE TO FLUCTUATE. Our quarterly operating results have varied in the past, and we expect that they will continue to vary in future periods depending on a number of factors, not all of which are within our control. The variation in our quarterly operating results could affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance. Our services revenue in any quarter depends on our mix of non-recurring and recurring revenue and our ability to meet project milestones and customer expectations. To increase our revenue in any operating period, we must penetrate new markets, expand within existing markets and develop new application and service offerings required by our customers. Our operating results will be harmed if we experience delays in developing new applications and services for our customers or defects in our current applications. We expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenues, and these expense levels are relatively fixed in the short-term. If we have lower revenue, we may not be able to reduce our short-term spending in response. Any shortfall in revenue would have a direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and our stock price could suffer. WE HAVE A LIMITED NUMBER OF CUSTOMERS AND RELATIVELY FIXED OPERATING COSTS, AND IF OUR CUSTOMERS TERMINATE OR MODIFY EXISTING CONTRACTS OR EXPERIENCE BUSINESS DIFFICULTIES, IT COULD ADVERSELY AFFECT OUR EARNINGS. Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated contract cancellations or reductions. As a result, any termination, significant reduction or modification of our business relationships with any of our significant customers or with a number of smaller customers could have a material adverse effect on our business, financial condition and operating results. As of December 31, 1999, we were providing services to approximately 129 customers. Two of our customers, Qualchoice of Arkansas and Preferred Health Network of Maryland represent 38% of our total revenue for the month of December 1999. We believe that our long-term success largely depends upon our ability to retain our customers and generate recurring revenues from contracts. Although we typically enter into multi-year customer agreements, a majority of our customers are able to reduce or cancel their use of our services before the end of the contract term, subject to monetary penalties. We also provide services to some customers without long-term contracts. Many of our contracts are structured so that we generate revenue based on units of volume, which include the number of physicians, number of patients, number of members or number of users. If our customers experience business difficulties and the units of volume decline or if that customer ceases operations for any reason, we will generate less revenue under these contracts and our operating results may be materially and adversely impacted. OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE MANAGEMENT AND OTHER SKILLED EMPLOYEES. Our success will depend in large part on the continued services of key management and skilled personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. We do not have employment agreements with most of our executive officers, so any of these individuals may terminate his or her employment with us at any time. We currently maintain a $5,000,000 key man life insurance policy on Jeffrey H. Margolis, our Chief Executive Officer. The loss of services of one or more of our key management employees, or the inability to hire additional key management personnel as needed, could have a material adverse effect on our business, financial condition and operating results. Although we currently experience relatively low rates of turnover for our skilled employees, the rate of turnover may increase in the future. In addition, we expect to further grow our operations, 16 18 and our needs for additional skilled employees will increase. Our continued ability to compete effectively in our business depends on our ability to attract, retain and motivate these individuals. WE ARE GROWING RAPIDLY, AND OUR INABILITY TO MANAGE THIS GROWTH COULD HARM OUR BUSINESS. We have rapidly and significantly expanded our operations and expect to continue to do so. This growth has placed, and is expected to continue to place, a significant strain on our managerial, operational, financial, information systems and other resources. As of December 1999, we had grown to approximately 648 employees and independent contractors, from approximately 75 employees and independent contractors in December 1997. We expect to hire a significant number of new employees to support our business. If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition and operating results. OUR ACQUISITION STRATEGY MAY DISRUPT OUR BUSINESS AND REQUIRE ADDITIONAL FINANCING. Since inception, we have made numerous acquisitions and expect to continue to acquire companies as part of our growth strategy. We compete with other companies to acquire businesses. We expect this competition to continue to increase, making it more difficult in the future to acquire suitable companies on favorable terms. Although we may acquire additional companies, we may be unable to successfully integrate them in a timely manner. If we are unable to successfully integrate acquired businesses, we may incur substantial costs and delays or other operational, technical or financial problems. In addition, the failure to successfully integrate acquisitions may divert management's attention from our existing business and may damage our relationships with our key customers and employees. To finance future acquisitions, we may issue equity securities that could be dilutive to our stockholders. We may also incur debt and additional amortization expenses related to goodwill and other intangible assets in future acquisitions. The interest expense related to this debt and additional amortization expense may significantly reduce our profitability and have a material adverse effect on our business, financial condition and operating results. WE EXPECT OUR LOSSES AND FLUCTUATIONS IN OPERATING RESULTS TO CONTINUE, WHICH MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS. We have lost money in four of our past 11 fiscal quarters (through December 31, 1999). Although our revenue has grown in recent periods, we cannot assure you that our revenues will continue at their current level or increase in the future. We cannot assure you that we will be consistently profitable on either a quarterly or annual basis. We currently derive our revenue primarily from providing application services and non-recurring services. We plan to invest heavily in acquisitions, infrastructure development, applications development and sales and marketing. As a result, we expect that we will lose money through the fiscal year ending December 31, 2000, and we may never achieve or sustain profitability. IF OUR ABILITY TO EXPAND OUR NETWORK INFRASTRUCTURE IS CONSTRAINED IN ANY WAY, WE COULD LOSE CUSTOMERS AND DAMAGE OUR OPERATING RESULTS. We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increase transaction volumes and changing customer requirements. We may not be able to accurately project the rate or timing of increases, if any, in the use of our application services or our portal or be able to expand and upgrade our systems and infrastructure to accommodate such increases. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers' changing needs on a timely basis, at a commercially reasonable cost or at all. Our current information systems, procedures and controls may not continue to support our operations while maintaining acceptable overall performance and may hinder our ability to exploit the market for healthcare applications and services. Service lapses could cause our users to switch to the services of our competitors. 17 19 WE COULD LOSE CUSTOMERS AND REVENUE IF WE FAIL TO MEET THE PERFORMANCE STANDARDS IN OUR CONTRACTS. Many of our service agreements, including our agreement with Caremark Rx, contain performance standards. If we fail to meet these standards, our customers could terminate their agreements with us or require that we refund part or all of the fees charged under those agreements. The termination of any of our material services agreements and/or associated revenue could have a material adverse effect on our business, financial condition and operating results. ANY FAILURE OR INABILITY TO PROTECT OUR TECHNOLOGY AND CONFIDENTIAL INFORMATION COULD ADVERSELY AFFECT OUR BUSINESS. Our success depends in part upon proprietary software and other confidential information. The software and information technology industries have experienced widespread unauthorized reproduction of software products and other proprietary technology. We do not own any patents. We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property. However, these protections may not be sufficient, and they do not prevent independent third party development of competitive products or services. We believe that our proprietary rights do not infringe upon the proprietary rights of third parties. However, third parties may assert infringement claims against us in the future, and we could be required to enter into a license agreement or royalty arrangement with the party asserting the claim. We may also be required to indemnify customers for claims made against them. PERFORMANCE OR SECURITY PROBLEMS WITH OUR SYSTEMS COULD DAMAGE OUR BUSINESS. Our customers' satisfaction and our business could be harmed if our customers or we experience any system delays, failures or loss of data. We currently process substantially all our customers' transactions and data at our facilities in Englewood, Colorado, Albany, New York, and Birmingham, Alabama. Although we have safeguards for emergencies and we have contracted backup processing for a portion of our customers' critical functions, we do not have sufficient backup facilities to process information if either or both of these facilities are not functioning. The occurrence of a major catastrophic event or other system failure at any of our facilities could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of Internet connections from customers to our systems. These connections, in turn, depend on the efficient operation of web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages. A material security breach could damage our reputation or result in liability to us. We retain confidential customer and patient information in our Customer Connectivity Centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. DEFECTIVE PRODUCTS, ERRORS OR IMPROPER HANDLING OF CUSTOMER DATA MAY CAUSE US TO LOSE CUSTOMERS OR SUBJECT US TO LIABILITY. Our customers demand reliability in the delivery of application services and quality when their transactions are processed. Although we devote substantial resources to meeting these demands, errors may occur. Errors and mistakes in the processing of customer data may result in loss of data, inaccurate information and delays. Such errors could cause us to lose customers and could result in liability and penalties. Our services agreements generally contain limitations on liability, and we maintain insurance with coverage limits of $24 million to protect against claims associated with the use of our products and services. However, the contractual provisions and insurance coverage may not provide adequate coverage against all possible claims that may be asserted. In addition, appropriate insurance may be unavailable in the future at commercially reasonable rates. A successful claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition and operating results. Even unsuccessful claims could result in litigation or arbitration costs and may divert management's attention from our existing business. 18 20 WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND IN OUR CONTRACTS THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF SUCH AN ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Certain provisions of our certificate of incorporation, our bylaws, Delaware law and our contracts could delay or prevent a third party from acquiring us, even if doing so might be beneficial to our stockholders. Some of these provisions: - authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of common stock; - prohibit stockholder action by written consent; - establish a classified board of directors; and - require advance notice for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting. OUR BUSINESS WILL SUFFER IF COMMERCIAL USERS DO NOT ACCEPT INTERNET SOLUTIONS. Our success depends in part on the adoption of Internet solutions by commercial users. Our business could suffer dramatically if Internet solutions are not accepted or not perceived to be effective. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including: - inadequate development of the necessary infrastructure for communication speed, access and server reliability; - security and confidentiality concerns; - lack of development of complementary products, such as high-speed modems and high-speed communication lines; - implementation of competing technologies; - delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; and - governmental regulation. We expect Internet use to grow in number of users and volume of traffic. The Internet infrastructure may be unable to support the demands placed on it by this continued growth. Growth in the demand for our application and portal services depends on the adoption of Internet solutions by healthcare participants, which requires the acceptance of a new way of conducting business and exchanging information. To maximize the benefits of our solutions, our customers must be willing to allow their applications and data to be hosted in our Customer Connectivity Centers. IF WE FAIL TO MEET THE CHANGING DEMANDS OF TECHNOLOGY, WE MAY NOT CONTINUE TO BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER PROVIDERS OF SOFTWARE APPLICATIONS AND HEALTHCARE PORTALS. The market for our technology and services is highly competitive and rapidly changing and requires potentially expensive technological advances. We believe our ability to compete in this market will depend in part upon our ability to: - maintain and continue to develop partnerships with vendors; - enhance our current technology and services; - respond effectively to technological changes; - sell additional services to our existing customer base; - introduce new technologies; and - meet the increasingly sophisticated needs of our customers. Competitors may develop products or technologies that are better or more attractive than those offered by us or that may render our technology and services obsolete. Many of our current and potential competitors are larger 19 21 and offer broader services and have significantly greater financial, marketing and other competitive resources than us. THE INTENSIFYING COMPETITION WE FACE FROM BOTH ESTABLISHED ENTITIES AND NEW ENTRIES IN THE MARKET MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. We face intense competition. Many of our competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and greater market recognition than we have. Many of our competitors also have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their applications or services than we can devote. Our competitors can be categorized as follows: - application service providers; - healthcare e-commerce and portal companies; - information technology outsourcing companies; - information technology consulting firms; and - healthcare information software vendors. Each of these types of companies can be expected to compete with us within the various segments of the healthcare information technology market. Furthermore, major software information systems companies and other entities, including those specializing in the healthcare industry that are not presently offering applications that compete with our technology and services, may enter these markets. In addition, some of our third party software vendors with whom we have licensing agreements, may compete with us from time to time by selling software on a stand-alone basis. We cannot assure you that we will be able to compete successfully against current and future competitors or that competitive pressures faced by us will not have a material adverse effect on our business, financial condition and operating results. CHANGES IN GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS. During the past several years, the healthcare industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and certain capital expenditures. In addition, proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates and otherwise adversely affect the healthcare industry which could adversely impact our business. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals in ways that could result in a reduction or deferral in the use of our technologies and services. We cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on our business, financial condition and operating results. The United States Department of Health and Human Services has proposed regulations regarding electronic signatures and the maintenance and transmission of computer medical records. These regulations establish certain standards for electronic record-keeping. We do not know if these regulations will be adopted in their present form or a different form or at all. However, if these regulations are adopted, they may require modifications to our computer software and record-keeping practices. These changes may require us to make substantial capital investments. We perform billing and claims services that are governed by numerous federal and state civil and criminal laws. The federal government in recent years has placed increased scrutiny on billing and collection practices of healthcare providers and related entities and particularly on potential fraudulent billing practices, such as submissions of inflated claims for payment and upcoding. Violations of the laws regarding billing and coding 20 22 may lead to civil monetary penalties, criminal fines, imprisonment or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for us and our customers. Any of these results could have a material adverse effect on our business, financial condition and operating results. Federal and state consumer protection laws may apply to us when we bill patients directly for the cost of physician services provided. Failure to comply with any of these laws or regulations could result in a loss of licensure or other fines and penalties. Any of these results could have a material adverse effect on our business, financial condition and operating results. The confidentiality of patient records is subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the physician or other healthcare providers, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of medical information to implement security measures and impose restrictions on the ability of third party processors, like us, to transmit certain patient data without specific patient consent. Any change in legislation could restrict healthcare providers from using our services. SINCE WE OPERATE AN INTERNET-BASED NETWORK, OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION RELATING TO THE INTERNET THAT COULD IMPAIR OUR OPERATIONS. Because of the increasing use of the Internet as a communication and commercial medium, the government has adopted and may adopt additional laws and regulations with respect to the Internet covering such areas as user privacy, pricing, content, taxation, copyright protection, distribution and characteristics and quality of production and services. Any of these regulations could have a material adverse effect on our business, financial condition and operating results. PROSPECTIVE CHANGES IN APPLICABLE ACCOUNTING STANDARDS COULD CHANGE THE WAYS WE RECOGNIZE REVENUE AND COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS. Prospective changes in the generally accepted accounting standards that apply to our business, including revenue recognition policies and amortization of charges associated with goodwill in acquisitions, could alter the way we recognize revenue and have an adverse effect on our financial results. WE MAY BE UNABLE TO RAISE ADEQUATE CAPITAL. We expect to pay for future acquisitions by issuing additional common stock, and if necessary by using cash. We cannot assure you that we will be able to raise additional funds through public and private financings. We cannot assure you that we will be able to raise additional funds at any particular point in the future or on favorable terms. THE TRADING PRICES AND VOLUMES OF OUR STOCK HAVE BEEN VOLATILE AND WE EXPECT THAT THIS VOLATILITY WILL CONTINUE. Our stock price and trading volumes have been highly volatile since our initial public offering on October 8, 1999. We expect that this volatility will continue in the future due to factors such as: - Actual or anticipated fluctuations in results of operations; - Changes in or failure to meet securities analysts' expectations; - Announcements of technological innovations and acquisitions; - Introduction of new services by us or our competitors; - Developments with respect to intellectual property rights; - Conditions and trends in the Internet, technology and healthcare industries; and - General market conditions. 21 23 In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stocks of technology companies. These broad market fluctuations may result in a material decline in the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts management's attention and resources, which could have a material adverse effect on our business and operating results. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS THE PRICE OF OUR COMMON STOCK. As of March 24, 2000, we had approximately 21.2 million shares of common stock outstanding. Sales of a substantial number of shares of common stock in the public market could cause the market price of our common stock to decline. In the near future, 12.3 million shares will become eligible for sale upon the expiration of our lockup period on April 4, 2000. Certain of our stockholders have registration rights with respect to the common stock. The exercise of these registration rights and subsequent sale of the securities could depress the price of our common stock. EMPLOYEES As of December 31, 1999, we had approximately 648 employees. Our employees are not subject to any collective bargaining agreements, and we generally have good relations with our employees. ITEM 2 -- PROPERTIES FACILITIES As of December 31, 1999, we leased 15 facilities, all located within the United States. Our principal executive and corporate offices are located in Newport Beach, California. Our Customer Connectivity Centers are located in Englewood, Colorado, Birmingham, Alabama and Albany, New York and our billing service centers are located in Shelton, Nebraska, Louisville, Kentucky and Cohoes, New York. We also have offices for our support staff, development and network operations in Englewood, Colorado, Provo, Utah, Moorestown, New Jersey, Glastonbury, Connecticut, Irving, Texas, Elmwood, New Jersey, Costa Mesa, California, Baltimore, Maryland and Albany, New York. We also maintain sales offices in New York, New York, and Atlanta, Georgia. Our leases have expiration dates ranging from 2000 to 2006. We believe that our facilities are adequate for our current operations and that additional leased space can be obtained if needed. ITEM 3 -- LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this report, we are not a party to any legal proceedings. The adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholders during the fourth quarter of 1999. 22 24 PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS We completed our initial public offering of common stock on October 14, 1999. The initial public offering price per share of common stock was $9.00. On March 24, 2000, the closing price of the common stock on the Nasdaq National Market was $65.25. Our common stock has been traded on the Nasdaq National Market under the symbol "TZIX" since October 8, 1999. Prior to that date, there was no public market for our common stock and, therefore, no quoted market prices for our common stock are available. As of March 24, 2000, there were 125 holders of record based on the records of our Transfer Agent which do not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The table below establishes the high and low closing sales prices for the period from October 8, 1999, the date of our initial public offering, through December 31, 1999, (as reported on the Nasdaq National Market).
QUARTER ENDED HIGH LOW ------------- ---- ----- December 31, 1999 $48.25 $7.00
We did not pay any dividends during the year ended December 31, 1999. We intend to retain all of our earnings to finance the expansion of our business and for general corporate purposes, including future acquisitions, and do not anticipate paying any cash dividends on our common stock in the foreseeable future. The payment of cash dividends by us is restricted by our current bank credit facilities, which contain restrictions prohibiting us from paying any cash dividends without the bank's prior approval. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of transactions by us from January 1, 1999 through the date hereof involving sales of our securities that were not registered with the Securities and Exchange Commission: - On February 15, 1999, we issued 572,000 shares of our common stock to former shareholders of Creative Business Solutions, Inc. in exchange for all of the issued and outstanding shares of capital stock of Creative Business Solutions. 114,400 of these shares are being held in escrow through February 15, 2001 to secure the indemnification obligations of the former shareholders of Creative Business Solutions. - On February 15, 1999, we issued 83,000 shares of our common stock to former partners of HealthWeb in exchange for the entire partnership interest of HealthWeb. 16,600 of these shares are being held in escrow through February 15, 2001 to secure the indemnification obligations of the former partners of HealthWeb. - On April 12, 1999, we sold 1,730,770 shares of our Series B preferred stock to five accredited investors for an aggregate offering price of $4,500,000. - On April 19, 1999, we issued 60,000 shares of our common stock to the former majority shareholder of Management and Technology Solutions in exchange for certain assets and liabilities of Management and Technology Solutions. - On August 2, 1999, we issued 162,595 shares of our common stock pursuant to the exercise of warrants held by KFS Management, Inc. - On November 29, 1999, we issued 549,786 shares of our common stock to former shareholders of Novalis Corporation in exchange for all of the issued and outstanding shares of capital stock of Novalis. 366,524 of these shares are being held in escrow through November 29, 2000 to secure the indemnification obligations of the former shareholders of Novalis. - On December 22, 1999, we issued 48,998 shares of our common stock to former shareholders of Finserv Health Care Systems, Inc. in exchange for all of the issued and outstanding shares of capital stock of Finserv. 20,000 of these shares are being held in escrow through December 22, 2000 to secure the indemnification obligations of the former shareholders of Finserv. 23 25 - On January 11, 2000, we issued 87,359 shares of our common stock to former shareholders of Healthcare Media Enterprises, Inc. in exchange for all of the issued and outstanding shares of capital stock of Healthcare Media Enterprises, Inc. 17,472 of these shares are being held in escrow through January 11, 2001 to secure the indemnification obligations of the former shareholders of Healthcare Media Enterprises. - From January 1, 1999 through December 14, 1999, the date on which our Registration Statement on Form S-8 was filed with the Securities and Exchange Commission with respect to our 1998 Stock Option Plan, we granted options to purchase an aggregate of 2,479,200 shares of common stock to employees and directors pursuant to our 1998 Stock Option Plan. - From January 1, 1999 through December 14, 1999, the date on which our Registration Statement on Form S-8 was filed with the Securities and Exchange Commission with respect to our 1998 Stock Option Plan, we issued 56,250 shares of common stock upon the exercise of options. We used any proceeds of the stock sales for working capital and other general corporate purposes. We did not employ any underwriters, brokers or finders in connection with any of the transactions set forth above. The sales of the securities listed above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or, with respect to issuances to employees, Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments representing such securities issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. USE OF PROCEEDS As of February 29, 2000, we have used a total of approximately $17.0 million of the net proceeds from our initial public offering, of which approximately $6.4 million was used for working capital and other general corporate purposes, approximately $7.6 million was used to acquire new businesses, approximately $1.4 million was used to pay down debt, and approximately $1.6 million was used for the purchase of property and equipment. We generally intend to use the remaining proceeds for the following: - expansion of our sales and marketing activities; - further development of application services and Internet technologies; - acquisition of additional software; - expansion into additional geographic markets; - enhancements of existing Customer Connectivity Centers; and - working capital and other general corporate purposes. We have not yet performed studies or determined how the remaining proceeds will be used, and thus cannot estimate the amounts to be used for each purpose discussed above. The amounts and timing of these expenditures will vary significantly depending on a number of factors, including, but not limited to, the amount of cash generated by our operations and the market response to the introduction of any new service offerings. In addition, we may continue to use a portion of the remaining net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to our current business, through mergers, acquisitions, joint ventures or otherwise. Management will continue to retain broad discretion as to the allocation of the remaining net proceeds. 24 26 ITEM 6 -- SELECTED FINANCIAL DATA The following selected consolidated financial data, except as noted herein, has been taken or derived from our audited consolidated financial statements and should be read in conjunction with the full consolidated financial statements included herein. The consolidated financial statements for the year ended December 31, 1996 and 1997 have not been included herein.
SELECTED CONSOLIDATED FINANCIAL DATA --------------------------------------------------- CROGHAN & ASSOCIATES, INC. FOR THE PERIOD ---------------------------- FOR THE YEAR ENDED FROM MAY 27, 1997 NINE MONTHS --------------------------- (DATE OF INCEPTION) ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, 1999 1998 1997 1997 1996 ------------ ------------ --------------------- ------------- ------------ Revenues: Recurring revenue......................... $19,448 $ 5,300 $1,191 $ 3,881 $ 5,088 Non-recurring revenue..................... 13,478 6,131 1,328 -- -- ------- ------- ------ ------- ------- Total revenues.............................. 32,926 11,431 2,519 3,881 5,088 ------- ------- ------ ------- ------- Cost of revenues: Recurring revenue......................... 17,057 3,967 1,250 3,609 4,068 Non-recurring revenue..................... 9,751 3,490 422 -- -- ------- ------- ------ ------- ------- Total cost of revenues...................... 26,808 7,457 1,672 3,609 4,068 ------- ------- ------ ------- ------- Gross profit................................ 6,118 3,974 847 272 1,020 ------- ------- ------ ------- ------- Operating expenses: Research and development.................. 2,371 1,083 -- -- -- Selling, general and administrative....... 9,694 2,885 672 2,415 2,142 Amortization of deferred stock compensation............................ 1,057 22 -- -- -- Write-off of acquired in-process technology.............................. 1,407 -- -- -- -- ------- ------- ------ ------- ------- Total operating expenses................ 14,529 3,990 672 2,415 2,142 ------- ------- ------ ------- ------- Income (loss) from operations............... (8,411) (16) 175 (2,143) (1,122) Interest income............................. 527 210 15 15 21 Interest expense............................ (256) (52) (13) (84) (1,341) ------- ------- ------ ------- ------- Income (loss) before provision for income taxes and extraordinary item............ (8,140) 142 177 (2,212) (2,442) Provision for (benefit of) income taxes..... (213) 82 74 -- -- ------- ------- ------ ------- ------- Income (loss) before extraordinary item..... (7,927) 60 103 (2,212) (2,442) Extraordinary item: Gain on forgiveness of debt............... -- -- -- 1,000 -- ------- ------- ------ ------- ------- Net income (loss)......................... $(7,927) $ 60 $ 103 $(1,212) $(2,442) ======= ======= ====== ======= ======= Net income (loss) per share: Basic..................................... $ (0.85) $ 0.01 $ 0.05 ======= ======= ====== Diluted................................... $ (0.85) $ 0.00 $ 0.03 ======= ======= ====== Shares used in computing net income (loss) per share: Basic..................................... 9,376 4,937 2,065 ======= ======= ====== Diluted................................... 9,376 12,783 4,074 ======= ======= ======
THE TRIZETTO GROUP, INC. CROGHAN & INC. ------------------------- ASSOCIATES DECEMBER 31, YEAR ENDED ------------------------- DECEMBER 31, 1999 1998 1997 1996 ------- ------ ------ -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments.......... $24,806 $3,681 $ 773 $ 1,757 Total assets................................................ 68,418 8,720 2,634 11,174 Total long-term debt and capital lease obligations.......... 2,728 645 520 1,400 Mandatorily redeemable convertible preferred stock.......... -- 6,449 -- -- Total stockholders' equity (deficit)........................ 51,296 (741) 563 7,819
25 27 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are the leading application services provider of remotely hosted third party and proprietary software applications and related services for use in the healthcare industry. We host software applications from leading software vendors, including Epic Systems, Inc., Medic Computer Systems, Inc., Raintree Systems, Inc., InfoMedtrics, Inc., CTR Business Systems, Inc., and McKesson HBOC, Inc., by operating and maintaining such applications at our Customer Connectivity Centers. We also offer HealthWeb, an Internet-browser based application that serves as a portal for the exchange of information and services over the Internet. HealthWeb is designed to facilitate the exchange of information and to enable e-commerce among all constituents of the healthcare industry. Through our Transformation Services Group, we offer business operations and applications integration non-recurring services, including information technology assessment and software implementation design and development. Our customers primarily consist of provider groups, physician practice management companies, and managed care organizations such as health maintenance organizations, preferred provider organizations and third party administrators. We were incorporated in Delaware in May 1997. In October 1997, we acquired all of the outstanding shares of common stock of Margolis Health Enterprises, Inc., an entity under our common control, in exchange for 3,716,667 shares of our common stock. In October 1997, we also acquired all of the outstanding shares of common stock of Croghan & Associates, Inc., an application services provider, in exchange for 5,800,895 shares of our common stock. In April 1998, we raised $6.0 million in gross proceeds by issuing 4,195,804 shares of our mandatorily redeemable convertible preferred stock to two venture capital firms. In October 1998, we raised an additional $500,000 in gross proceeds by issuing another 349,650 shares of our mandatorily redeemable convertible preferred stock. In February 1999, we simultaneously acquired Creative Business Solutions, Inc., an Internet solutions development company, specializing in the integration of healthcare information technology and contract programming solutions and HealthWeb Systems, Ltd., an Internet software and portal development company, specializing in customized healthcare applications, for a total consideration of approximately $3.3 million, consisting of approximately $1.4 million of cash, 655,000 shares of our common stock, a two year note of $270,000 bearing interest at 8%, assumed liabilities of $527,000 and acquisition costs of approximately $100,000. The acquisition of Creative Business Solutions and HealthWeb Systems was accounted for using the purchase method of accounting. The excess of the purchase price over the fair market value of the assets purchased and liabilities assumed was $2.6 million, of which $484,000 was allocated to acquired in-process technology, based upon an independent appraisal, and was written-off in the year ended December 31, 1999, and $2.1 million was allocated to goodwill and intangible assets consisting of assembled workforce and Creative Business Solutions customer lists. The HealthWeb product is designed to solve problems for hospitals, health plan administrators and insurance providers, such as office administration activities, connectivity to health plans and communications with patients. Payers will use HealthWeb for information exchange with providers and members, such as eligibility, authorizations, referrals, benefit verification, claims status and patient record information. At the date of acquisition, we determined the technological feasibility of HealthWeb's product was not established. Approximately $650,000 in research and development had been spent up to the date of acquisition in an effort to develop the technology to produce a commercially viable product. The future research and development expense associated with the in-process product was estimated to be approximately $975,000 between July 1999 and the first quarter of 2000. We expected to introduce the final product by year-end 1999. As of December 31, 1999, the in-process product was completed and released during the fourth quarter of 1999 at a cost of approximately $950,000. Risks which may affect the commercialization of this product include new technologies or new products which may make our product obsolete. At the date of acquisition, the only identifiable intangible assets acquired were the technology under development, the acquired workforce and the customer lists. 26 28 The valuation methodology used in the Creative Business Solutions and HealthWeb Systems acquisitions included an analysis and estimation of the fair market value and remaining economic life of both the core and in-process technologies on a going concern basis. The valuation of the business enterprise and the acquired in-process technology were developed by discounting projected future net cash flows at a 35% discount rate; this reflects both the return requirements of the market and risks inherent in the investment. In April 1999, we acquired certain assets and liabilities of Management and Technology Solutions, Inc., a physician services organization, in exchange for 60,000 shares of our common stock. The assets acquired from Management and Technology Solutions included property and equipment, intellectual property, consisting of patents, trademarks and licenses, computer software and software licenses. The liabilities assumed included lease obligations, a note payable for a software license and other accrued liabilities. In April 1999, we raised $4.5 million in gross proceeds by issuing 1,730,770 shares of mandatorily redeemable convertible preferred stock to three venture capital firms. In May 1999, we entered into an agreement with Caremark Rx, Inc. (formerly known as MedPartners, Inc.) to provide hosted information technology services to Caremark Rx with respect to approximately 1,800 physicians while Caremark Rx terminates its relationships with these groups. In addition, we purchased hardware, furniture and fixtures and a software license for $2.4 million from Caremark Rx and paid a software license transfer fee of $280,000. The initial term of the agreement expired on December 31, 1999. However, Caremark Rx did not complete the disassociation process by December 31, 1999 and subsequently the term of the agreement was extended through June 30, 2000. As Caremark Rx terminates its relationships with each remaining group, we have the opportunity to enter into a new multi-year contract with the group, specifically tailored to address its information technology needs. We cannot assure you that, as the disassociation process continues, we will succeed in doing so. As of December 31, 1999, 25% of the physicians we initially serviced under the Caremark Rx agreement had chosen alternative providers of information technology services. As of December 31, 1999, we had negotiated multi-year contracts with 14 disassociated groups, representing approximately 1,211 physicians, or 67% of the total physicians available at the time the Caremark Rx agreement was signed. We are pursuing the opportunity to provide customized application services to three groups on an ongoing basis, representing approximately 140 physicians, or 8% of the total physicians available at the time the Caremark Rx agreement was signed. We will lose revenue if we are not successful in entering into service contracts directly with these three groups replacing the information technology services previously provided by Caremark Rx or if we are requested to provide a reduced scope of services. In October 1999, we completed our initial public offering of 4,480,000 shares of common stock, including 630,000 shares in connection with the exercise of underwriters' over-allotment option, at a price of $9.00 per share, that raised approximately $36.0 million, net of underwriting discounts, commissions and other offering costs. In addition, in connection with the offering, 350,000 shares of common stock of were sold by a selling stockholder at $9.00 per share, for which we received no proceeds. Upon the closing of the offering, all of our mandatorily redeemable convertible preferred stock converted into approximately 6,276,000 shares of common stock. In November 1999, we acquired all the outstanding shares of Novalis Corporation. The purchase price of approximately $18.7 million consisted of cash in the amount of approximately $5.0 million, 549,786 shares of common stock with a value of $16.37 per share, assumed liabilities of $1.9 million and acquisition costs of approximately $2.8 million. Of the total purchase price, $923,000 was allocated to in-process technology and the remainder of the purchase price was allocated to assets acquired and liabilities assumed. The acquisition of Novalis was accounted for using the purchase method of accounting. The excess of the purchase price over the fair market value of the assets purchased and liabilities assumed was $13.5 million, of which $923,000 was allocated to acquired in-process technology, based upon an independent appraisal, and was written-off in the year ended December 31, 1999, and $12.6 million was allocated to goodwill and intangible assets consisting of assembled workforce, core technology and customer lists. As of the acquisition date, Novalis was developing several enhancements to its proprietary software products. Approximately $535,000 in research 27 29 and development had been spent up to the date of the acquisition in an effort to develop the next releases of the in-process and core technology. The future research and development expense associated with the in-process and core technology was estimated to be approximately $490,000. The in-process and core technology was scheduled to be released by June 30, 2000. The proprietary software products of Novalis includes systems which manage the following: - claims processing -- patient profiles, claims processing, provider contracts and other core data processing and storage functions - medical management -- allows clients to track utilization management, patient referrals, authorizations and case management - provider credentialing management -- allows clients to verify a physician's credentials - data warehousing -- produces standardized ad hoc reports that allow in-depth analysis of a business In valuing Novalis' developed, in-process and core technologies, we utilized the relief from royalty method. The relief from royalty method assumes that the value of the intangible asset is estimated by quantifying the royalties saved due to our ownership of the software. A revenue stream for the asset was estimated based on Novalis' total revenue projections over its estimated life. An appropriate royalty rate is then applied to the forecasted revenue to estimate the pre-tax income associated with the asset. This income stream was tax effected and discounted to its present value to estimate the value of the developed, in-process and core technologies. For purposes of this analysis, we used 15%, 20% and 25% discount rates for the developed, in-process and core technologies, respectively. These discount rates are consistent with the risks inherent in achieving the projected cash flows. In December 1999, we acquired all of the outstanding shares of Finserv Health Care Systems, Inc. Finserv is a billing and accounts receivable management company focusing on the outpatient sector of the healthcare industry. The purchase price of approximately $4.8 million consisted of cash in the amount of approximately $1.8 million, 48,998 shares of common stock with a value of $30.61 per share, assumed liabilities of $1.1 million, and acquisition costs of approximately $0.4 million. Our revenues are classified into two categories: recurring or multi-year contractually based revenue, and revenue generated via non-recurring agreements. Since inception, the relative percentages of non-recurring revenue and recurring revenue were 45% and 55%, respectively. For the year ended December 31, 1999, the relative percentages of recurring revenue and non-recurring revenue were 59% and 41%, respectively. As we sign additional multi-year application services contracts, we expect the relative percentage of recurring revenue to continue to increase. Recurring revenue is subscription based and billed on a monthly basis over a contract term of typically three to five years. The amount billed monthly is based on units of volume, such as numbers of physicians, members or desktops covered by each contract. Recurring revenue is recognized ratably over the term of the contract, and cash received in excess of revenue recognized is recorded as deferred revenue. Non-recurring revenue is billed on either a time and materials or a fixed fee basis, and is recognized as the non-recurring services are performed. Cost of revenues are those costs related to the products and services we provide to our customers, and costs associated with the operation and maintenance of our Customer Connectivity Centers. These costs include salaries and related expenses for consulting personnel, Customer Connectivity Centers personnel, customer support personnel, application software license fees, telecommunications and maintenance costs. Research and development expenses are salaries and related expenses associated with the development of technologies, applications and services and include compensation paid to engineering personnel and fees to outside contractors and consultants. Selling, general and administrative expenses consist primarily of salaries and related expenses for sales, account management, marketing, administrative, finance, legal, human resources and executive personnel, commissions, expenses for marketing programs and trade shows and fees for professional services. We anticipate that sales, general and administrative costs will continue to increase in absolute dollars as we add sales, marketing 28 30 and administrative personnel, increase our marketing and promotional activities and incur costs related to being a public company, such as directors' and officers' insurance premiums and professional fees. As of December 31, 1999, we had recorded deferred compensation related to options granted to employees in the total amount of $6.9 million, representing the difference between the deemed fair value of our common stock, as determined for accounting purposes, and the exercise price of the options at the date of grant. Of this amount, $22,000 had been amortized in 1998, and approximately $1.1 million had been amortized in 1999. Future amortization of expenses arising out of options granted through the date hereof is estimated to be $1.7 million for the year ended December 31, 2000, $1.7 million for the year ended December 31, 2001, $1.7 million for the year ended December 31, 2002, and $672,000 for the year ended December 31, 2003. We amortize the deferred compensation charge over the vesting period of the underlying option. 29 31 OPERATING DATA The following table combines the operating data of Croghan & Associates, Inc. (now known as TriZetto Application Services, Inc.) for the nine months ended September 30, 1997 and TriZetto for the period from May 27, 1997 (date of inception) to December 31, 1997 in order to facilitate management's discussion of financial results. Certain costs and expenses presented in the statement of operations data of Croghan & Associates represents allocations and management estimates. As a result, the statement of operations data presented for Croghan & Associates is not strictly comparable to those of subsequent periods and may not be indicative of the results of operations that would have been achieved had the Croghan & Associates business operated as a non-affiliated entity during such period. OPERATING DATA (IN THOUSANDS)
HISTORICAL ------------------------------------------------- TRIZETTO CROGHAN & ASSOCIATES, INC. MAY 27, 1997 NINE MONTHS ENDED (DATE OF INCEPTION) SEPTEMBER 30, 1997 TO DECEMBER 31, 1997 COMBINED -------------------------- -------------------- -------- Revenues: Recurring revenue......................... $ 3,881 $1,191 $ 5,072 Non-recurring revenue..................... -- 1,328 1,328 ------- ------ ------- Total revenues.............................. 3,881 2,519 6,400 ------- ------ ------- Cost of revenues: Recurring revenue......................... 3,609 1,250 4,859 Non-recurring revenue..................... -- 422 422 ------- ------ ------- Total cost of revenues...................... 3,609 1,672 5,281 ------- ------ ------- Gross profit................................ 272 847 1,119 ------- ------ ------- Operating expenses: Selling, general and administrative....... 2,415 672 3,087 ------- ------ ------- Income (loss) from operations............... (2,143) 175 (1,968) Interest income............................. 15 15 30 Interest expense............................ (84) (13) (97) ------- ------ ------- Income (loss) before provision for income taxes and extraordinary item........... (2,212) 177 (2,035) Provision for income taxes.................. -- 74 74 ------- ------ ------- Income (loss) before extraordinary item..... (2,212) 103 (2,109) Extraordinary item: Gain on forgiveness of debt............... 1,000 -- 1,000 ------- ------ ------- Net income (loss)........................... $(1,212) $ 103 $(1,109) ======= ====== =======
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998. REVENUES. Total revenues in 1999 increased $21.5 million, or 188%, to $32.9 million from $11.4 million in 1998. The majority of this increase was due to the overall growth in both recurring revenue and non-recurring revenue throughout the year ended December 31, 1999. Additionally, the acquisitions of Creative Business Solutions and HealthWeb Systems in February 1999 and Novalis in November 1999 generated approximately $3.5 million and $1.9 million, respectively of incremental revenue in 1999. 30 32 Recurring revenue in 1999 increased $14.1 million, or 267%, to $19.4 million from $5.3 million in 1998. Incremental revenue generated as a result of our May 1999 agreement to provide hosted information technology services to Caremark Rx with respect to approximately 1,800 physicians represented $7.4 million of the increased revenue. Additionally, the acquisition of Novalis in November 1999 generated approximately $1.2 million of recurring revenue in 1999. Non-recurring revenue in 1999 increased $7.4 million, or 120%, to $13.5 million from $6.1 million in 1998. This increase reflected an overall increase in demand for our non-recurring services throughout the year. Additionally, the acquisition of Novalis in November 1999 generated approximately $700,000 of the increased revenue. COST OF REVENUES. Cost of revenues in 1999 increased $19.3 million, or 260%, to $26.8 million from $7.5 million in 1998. This increase was due to the costs incurred to support the overall expansion of our business. As a percentage of total revenues, cost of revenues approximated 81% in 1999 and 65% in 1998. Cost of recurring revenue in 1999 increased $13.1 million, or 330%, to $17.1 million from $4.0 million in 1998. This increase represented the incremental expenses for personnel and facilities costs incurred to support the growing application services provider business, including the incremental costs associated with the Caremark Rx contract signed in May 1999. Additionally, incremental infrastructure costs were required in 1999 to support our transition from our former data center to our new Customer Connectivity Center in Englewood, Colorado. As a percentage of recurring revenue, cost of recurring revenue approximated 88% in 1999 and 75% in 1998. Cost of non-recurring revenue in 1999 increased $6.3 million, or 179%, to $9.8 million from $3.5 million in 1998. This increase was due to incremental costs required to support increasing demand for our non-recurring services in 1999. As a percentage of non-recurring revenue, cost of non-recurring revenue approximated 72% in 1999 and 57% in 1998. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased $1.3 million, or 119%, to $2.4 million from $1.1 million in 1998. The majority of this increase relates to the development of our HealthWeb Business to Business portal and its e-applications. Expenses relating to system enhancements from which we derive revenue are not classified as research and development and are included in cost of revenues. As a percentage of total revenues, research and development expenses approximated 7% in 1999 and 9% in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses in 1999 increased $6.8 million, or 236%, to $9.7 million from $2.9 million in 1998. This increase was due primarily to expansion of the sales force, staff growth in management and administrative support areas, and expansion of related office space. As a percentage of total revenues, selling, general and administrative expenses approximated 29% in 1999 and 25% in 1998. AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock compensation was $1.1 million in 1999 from $0 in 1998. Deferred stock compensation represents the allocated portion of the difference between the deemed fair value of our common stock and the exercise price of stock options granted by us to employees. WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Our acquisitions of Creative Business Solutions and HealthWeb Systems in February 1999 resulted in an excess of purchase price over the fair market value of the assets purchased and liabilities assumed of $2.5 million. Of this amount, $484,000 was allocated to acquired in-process technology, based upon an independent appraisal, and was written-off in 1999. In addition, our acquisition of Novalis Corporation in November 1999 resulted in an excess purchase price over the fair market value of the assets purchased and liabilities assumed of $13.6 million. Of this amount, $923,000 was allocated to acquired in process technology, based on an independent appraisal and was written off in 1999. INTEREST INCOME. Interest income in 1999 increased $317,000, or 151%, to $527,000 from $210,000 in 1998. The increase was due to the incremental cash invested in 1999 resulting from $4.5 million in gross proceeds we raised in April 1999, and the full year impact of our investing approximately $6.0 million in gross proceeds we raised in April 1998. The increase is also a result of the investment of the net proceeds of $36.0 million raised during the Company's Initial Public Offering in October 1999. 31 33 INTEREST EXPENSE. Interest expense in 1999 increased $204,000, or 392%, to $256,000 from $52,000 in 1998. The increase is due to interest paid on notes payable issued in February 1999 in connection with our purchase of HealthWeb and Creative Business Solutions, notes payable in connection with our purchase of software applications licenses, and capital lease obligations for the purchase of computer and other office equipment. PROVISION FOR INCOME TAXES. Provision for income tax in 1999 decreased $295,000 to a tax benefit of $213,000 from a tax expense of $82,000 in 1998. The benefit was primarily generated from the pre-tax loss, partially offset by the recording of a valuation allowance on the deferred tax assets. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE COMBINED YEAR ENDED DECEMBER 31, 1997 REVENUES. Total revenues in 1998 increased $5.0 million, or 79%, to $11.4 million from $6.4 million in 1997. This increase was primarily due to a full year of non-recurring service revenue in 1998 as compared to seven months of non-recurring service revenue in 1997. Recurring revenue in 1998 increased $200,000, or 4%, to $5.3 million from $5.1 million in 1997. Non-recurring revenue in 1998 increased $4.8 million, or 362%, to $6.1 million from $1.3 million in 1997. This increase was primarily the result of the recognition of a full year of non-recurring revenue in 1998, with approximately seven months of non-recurring revenue recognized in 1997, 1998 non-recurring revenues also reflected the growth and demand for our non-recurring services from our inception in May 1997 through the year ended December 31, 1998. COST OF REVENUES. Cost of revenues in 1998 increased $2.2 million, or 41%, to $7.5 million from $5.3 million in 1997. As a percentage of total revenues, cost of revenues approximated 65% in 1998 and 83% in 1997. Cost of recurring revenue in 1998 decreased $900,000, or 18%, to $4.0 million from $4.9 million in 1997. This decrease was primarily the result of the elimination of amortization of internally developed software as of the date of the acquisition of Croghan & Associates on October 1, 1997. As a percentage of recurring revenue, cost of recurring revenue approximated 75% in 1998 and 96% in 1997. Cost of non-recurring revenue in 1998 increased $3.1 million, or 727%, to $3.5 million from $422,000 in 1997. This increase was primarily the result of a full year of non-recurring operations occurring in 1998 with approximately seven months of non-recurring operations occurring in 1997. The 1998 increase also reflected the costs required to support the growing business demands for our non-recurring services during that period. As a percentage of non-recurring revenue, cost of non-recurring revenue approximated 57% in 1998 and 32% in 1997. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which excluded development expenses that were included in cost of revenues, in 1998 increased to $1.1 million from $0 in 1997. The increase was primarily due to Year 2000 remediation of our owned software that is used in the provision of application services to our customers. As a percentage of total revenues, research and development expense approximated 9% in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses in 1998 decreased $202,000, or 7%, to $2.9 million from $3.1 million in 1997. During 1997, Croghan & Associates had recognized approximately $350,000 of amortization expense related to goodwill. This expense was eliminated as of the acquisition of Croghan & Associates on October 1, 1997. As a percentage of total revenues, selling, general and administrative expenses approximated 25% in 1998 and 48% in 1997. AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock compensation increased $22,000 in 1998 from $0 in 1997. This amount represents the allocated portion of the difference between the deemed fair value of our common stock and the exercise price of stock options granted by us to employees. INTEREST INCOME. Interest income in 1998 increased $180,000, to $210,000 from $30,000 in 1997. The increase was due to incremental cash available for investments resulting from approximately $6,000,000 in gross proceeds raised in the April 1998 private financing. 32 34 INTEREST EXPENSE. Interest expense in 1998 decreased $45,000, or 46%, to $52,000 from $97,000 in 1997. The decrease was due to the forgiveness of $1.0 million of debt in 1997. PROVISION FOR INCOME TAXES. Provision for income tax in 1998 increased $8,000, or 11%, to $82,000 from $74,000 in 1997. The increase was primarily due to an increase in tax deductions for book purposes in 1998 not recognizable for tax purposes. LIQUIDITY AND CAPITAL RESOURCES Since inception we have financed our operations primarily through a combination of cash from operations, private financings and an initial public offering of our common stock. As of December 31, 1999 we had approximately $26.0 million of cash, cash equivalents, short-term investments and long-term investments. Cash used in operating activities in 1999 was $3.0 million. Cash used during this period was primarily attributable to net losses of $7.9 million, which was offset in part by depreciation and amortization, amortization of deferred stock compensation, and write off of in-process technology. These losses were principally related to increased research and development expenses and sales, general and administrative expenses. In addition, the losses were generated by the expansion of our infrastructure to support growing demand of our recurring line of business. The increase in cash used in investing activities in the 12 months ended December 31, 1999 was primarily the result of our purchase of $3.2 million in property and equipment and software licenses; our purchase of $7.2 million in short-term and long-term equity investments; our acquisition of $2.6 million of hardware, furniture and fixtures and software licenses from Caremark Rx in May 1999; the $1.3 million cash portion (net of cash acquired) of our acquisition of HealthWeb and Creative Business Solutions in February 1999; the $4.3 million cash portion (net of cash acquired) of our acquisition of Novalis in November 1999; and the $1.8 million cash portion (net of cash acquired) of our acquisition of Finserv in December 1999. The increase in cash provided by financing activities in the 12 months ended December 1999 was primarily the result of the net proceeds of $36.0 million raised in our October 1999 initial public offering, in addition to the gross proceeds raised in our April 1999 private financing of $4.5 million. The increase in cash from these proceeds was reduced by payments we made to eliminate the line of credit assumed with the Creative Business Solutions acquisition, as well as principal payments on notes payable and capital lease obligations. In March 1999, we entered into a revolving line of credit agreement with a financial institution. In October 1999, we entered into a subsequent agreement which increased the amount available under the line of credit. The total amount available for borrowings under the line of credit is $3.0 million and expires in November 2000. Borrowings under the line of credit bear interest at the bank's prime rate plus 0.5% (9.0% as of December 31, 1999). Interest is payable monthly as it accrues. The credit agreement contains certain covenants that we must adhere to during the term of the agreement, including restrictions on the payment of dividends. As of December 31, 1999, there were no outstanding borrowings on the line of credit. In December 1999, we entered into a line of credit with a financial institution. This line of credit was specifically established to finance computer equipment purchases. The line of credit has a total capacity of $2.0 million and expires in December 2000. Borrowings under the lease line of credit at December 31, 1999 totaled approximately $973,000, and are collateralized by substantially all of our assets. We believe existing cash balances, cash generated from operations and future borrowings under our line of credit will be sufficient to meet our working capital and capital requirements for at least the next 12 months. IMPACT OF THE YEAR 2000 We established and implemented a program to address the possibility of computer failure upon entering the year 2000 (Year 2000). The program encompassed the entire company and all aspects of Year 2000 compliance including our internal information technology systems, non-information technology systems, internally developed software, licensed software developed by third parties, third party network infrastructure providers by which we gain access to the internet, key suppliers, and development of contingency plans and year end support plans. All 33 35 phases of the program were completed by the end of 1999. The total costs of these efforts incurred through December 31, 1999 were approximately $650,000. To date, we have not experienced any major system failures or other adverse consequences due to Year 2000 noncompliance. While the possibility still exists for future computer failures, internally or among our customers and suppliers, we do not expect that these developments, should they occur, would have a material adverse impact on our financial position, results of operations, or cash flows. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ("SFAS 133"), Accounting for Derivative Instruments and Hedging activities. SFAS 133 establishes methods of accounting and reporting for derivative instruments and hedging activities related to those instruments as well as other hedging activities, and is effective for all fiscal quarters for all fiscal years beginning after June 15, 2000, as amended by SFAS 137. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. To date, we have not engaged in derivative and hedging activities. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. We believe that adopting SAB 101 will not have a material impact on our financial position or results of operations. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact our financial position, operating results or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk due to changes in United States interest rates. This exposure is directly related to our normal operating and funding activities. Historically and as of December 31, 1999, we have not used derivative instruments or engaged in hedging activities. The interest payable on our $3.0 million credit facility is variable, based on the prime rate, and, therefore, affected by changes in market interest rates. Although as of December 31, 1999, the amount outstanding on our credit facility was zero, letters of credit approximating $319,000 had been written against the credit facility. The line of credit expires in November 2000. Changes in interest rates have no impact on our other debt as all of our other notes are at fixed interest rates between 8% and 10%. We manage interest rate risk by investing excess funds in cash equivalents and short-term investments bearing variable interest rates, which are tied to various market indices. As a result, we do not believe that near-term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 are set forth at the pages indicated at Item 14(a)(1). ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 34 36 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT JEFFREY H. MARGOLIS, 36, co-founded TriZetto and has served as our Chief Executive Officer, President and Director since inception. In August 1999, Mr. Margolis was named Chairman of the Board. From July 1994 to February 1997, Mr. Margolis served as Senior Vice President and Chief Information Officer of FHP International Corporation, a managed care organization. From November 1992 to June 1994, Mr. Margolis served as Vice President and Chief Information Officer of TakeCare, Inc., a managed care organization. From September 1989 to October 1992, Mr. Margolis held various executive positions, including Vice President and Chief Operating Officer of Comprecare, a managed care organization. From June 1984 to September 1989, Mr. Margolis served in various positions with Andersen Consulting, including his final position as Manager, Healthcare Consulting. Mr. Margolis received his B.S. degree in Business Administration -- Management Information Systems from the University of Illinois at Urbana-Champaign in 1984. Mr. Margolis earned his State of Illinois Certified Public Accountant certification in 1984 and his State of Colorado Certified Public Accountant certification in 1988. DONALD J. LOTHROP, 40, has been a director since April 1998. Mr. Lothrop has been a General Partner of Delphi Management Partners II, L.P. since July 1994, a General Partner of Delphi Management Partners III, L.L.C. since March 1995 and a General Partner of Delphi Management Partners IV, L.L.C. since October 1997. From January 1991 to June 1994, Mr. Lothrop was a Partner of Marquette Venture Partners, a venture capital firm, where he focused on the healthcare area. From 1989 to 1990, he worked at Bain & Company, Inc., a management consulting firm. Mr. Lothrop received his B.S. degree from Pennsylvania State University in 1981 and his M.B.A. from Harvard Business School in 1989. PETER D. MANN, 32, has been a director since April 1998. Mr. Mann joined Fidelity Ventures, the venture capital arm of Fidelity Investments in January 1994. Mr. Mann is currently a Vice President of Fidelity Ventures and he focuses on investment opportunities in business services. Mr. Mann has been a Vice President of Fidelity Capital Associates, Inc., the general partner of Fidelity Venture Limited, since July 1998. Mr. Mann received his B.S. degree in Business Administration from Bucknell University in 1989 and his M.B.A. degree from Northeastern University in 1993. PAUL F. LEFORT, 58, has been a director since April 1999. From October 1995, until he retired in January 2000, Mr. LeFort served as the Chief Information Officer for United HealthCare Corporation, a health and well being company. Mr. LeFort is currently performing consulting services to United HealthCare Corporation. From November 1994 to October 1995, Mr. LeFort was the Senior Vice President and Chief Information Officer for The MetraHealth Companies, Inc., jointly owned by Travelers Insurance Company and Metropolitan Life Insurance Company. From 1975 to 1994, Mr. LeFort served as a senior partner at Deloitte & Touche Management Consulting for Health Care Information Systems. Mr. LeFort received his B.S. degree in Physics/ Economics from Boston College in 1962. WILLIAM E. FISHER, 53, has been a director since March 1999. Mr. Fisher has served as Chairman of Transaction Systems Architects, Inc. since founding that company in November 1993. Mr. Fisher was employed by Applied Communications, Inc., the predecessor to Transaction Systems, from March 1987 to November 1993. Prior to March 1987, Mr. Fisher was President of First Data Resources, Government Services Division. Mr. Fisher is on the board of directors of two public companies, Hypercom Corporation and West Teleservices, Inc. Mr. Fisher received his B.S. degree from Indiana State University and his M.B.A. from the University of Nebraska. SHAWN P. BOWEN, 34, joined us in July 1997 as our Vice President, Desktop & Network Services. Since June 1999, Mr. Bowen has served as Vice President and Chief Technical Officer, Connectivity Services Group. Mr. Bowen served as Director of Desktop Strategy for FHP Healthcare/PacifiCare, a managed care organization from July 1994 to June 1997. Prior to July 1994, Mr. Bowen held various information technology management positions at TakeCare, Inc., a managed care organization, Comprecare, Inc., a managed care organization, and a consulting position at Andersen Consulting. Mr. Bowen received his B.S. degree in Business Administration and Management Information Systems from Colorado State University in 1987. 35 37 LAWRENCE BRIDGE, 39, joined us in November 1999 as our Senior Vice President, Payor ASP Services. From July 1997 to November 1999, Mr. Bridge served as President of Novalis Services Corporation, an application services provider for managed-care and provider-based organizations, which we acquired in November 1999. From February 1997 to July 1997, Mr. Bridge served as a Regional Vice President for PacifiCare, a managed care organization. From June 1996 to February 1997, Mr. Bridge served as a Group President for FHP Healthcare, a managed care organization. From July 1994 to June 1996, Mr. Bridge served as President of FHP of Utah, a managed care organization. Mr. Bridge received his Masters degree in B.A. in 1985 and his B.S. degree in Finance and Marketing in 1982, both from the University of Utah. DEBRA A. BRIGHTON, 45, joined us in January 1998 as our Vice President of Applications Development. In December 1999, Ms. Brighton title was changed to Vice President, Applications. From May 1997 to December 1997, Ms. Brighton served as a consultant at Andersen Consulting. From July 1994 to May 1997, Ms. Brighton served as Associate Vice President, Information Services for PacifiCare, a managed care organization. Prior to July 1994, Ms. Brighton held various information technology management positions at TakeCare, Inc., a managed care organization, United HealthCare Corporation, a health and well being company, Lincoln National Employee Benefits, an insurance company, and CyCare Systems, Inc., a practice management software vendor. HARVEY GARTE, 50, joined us in June 1999 as Vice President, Corporate Development. In October 1999, Mr. Garte was named as our Vice President, Corporate Development and Investor Relations. From July 1996 to the present, Mr. Garte has served as President of Garte & Associates, Inc., an investment banking firm. From November 1994 to July 1996, Mr. Garte served as President of Garte Torre Global Capital Markets, an investment banking firm. From 1983 to 1994, Mr. Garte served as President of The Garte Company, Inc., an investment banking firm. Mr. Garte earned his B.A. degree in Economics from Adelphi University in 1971, and his M.B.A. from Lehigh University in 1973. LU KABIR, 43, joined us in June 1999 as our Vice President, Marketing and Business Development. In August 1999, Mr. Kabir was named as our Senior Vice President, Marketing and Business Development. From July 1997 to January 1999, Mr. Kabir served as Vice President, Global Business Development for Crossworlds Software, Inc., an enterprise applications integration software company. From November 1991 to July 1997, Mr. Kabir served in various executive positions in marketing and business development for Oracle Corporation's New Media and Technologies, including Vice President of Worldwide Sales, Services and Business Development for Oracle-Network Computers, Inc. (now known as Liberate Technologies, Inc.), a majority-owned subsidiary of Oracle Corporation. Mr. Kabir earned his Bachelor of Commerce degree from the University of Dhaka, Bangladesh in 1975 and earned his M.B.A. degree from Sam Houston State University, Texas in 1977. D. BRIAN KARR, 33, joined us in August 1997 as Director of Finance and was our Chief Financial Officer until May 1999. Mr. Karr was named as our Vice President of Finance in August 1999. Mr. Karr served as our Director of Finance from May 1999 to August 1999. Mr. Karr has served as our Treasurer since May 1999. Mr. Karr served as Director of Finance for Information Services for PacifiCare Health Systems, Inc., a managed care organization, from February 1997 to July 1997. Mr. Karr served as Director of Finance for Information Systems for FHP International Corporation, a managed care organization from October 1994 to February 1997. Prior to October 1994, Mr. Karr held various management positions in finance for TakeCare, Inc., a managed care organization, and Ernst & Young, LLP. Mr. Karr received his B.S. degree in accounting from Biola University in 1989. Mr. Karr received his State of California Certified Public Accountant Certification in 1992. KERRY M. KEARNS, 50, joined us in January 1999 as our Senior Vice President, Core Solutions. In December 1999, Mr. Kearns title was changed to Senior Vice President, ASP Providers. From March 1996 to December 1998, Mr. Kearns served as a Senior Manager at Andersen Consulting. From March 1991 to February 1996, Mr. Kearns served as Vice President and General Manager of Medaphis Physician Services Corporation, a physician practice management services company. Mr. Kearns received his B.S. degree from University of California at Davis in Biological Sciences and Chemistry in 1971 and earned his M.S. degree in Computer Science from the University of Nevada at Reno in 1989. GAIL H. KNOPF, 53, joined us in April 1999 and has served as our Vice President of e-Commerce from June 1999 to December 1999. In January 2000, Ms. Knopf was promoted to Senior Vice President, e-Business. From April 1997 to March 1999, Ms. Knopf served as Executive Vice President, Chief Information Officer and 36 38 a Director of Management and Technology Solutions, Inc., a physician services provider. From 1993 to 1997, Ms. Knopf served as Vice President and Chief Information Officer of Humana, Inc., a managed care organization. From 1969 to 1993, Ms. Knopf held various positions with Humana, both in the managed care and the hospital divisions, including Vice President of Systems Development. Ms. Knopf earned her B.A. degree in Mathematics from Vanderbilt University in 1968. CHRISTINE A. MILLER, 35, joined us in January 2000 as our Vice President, Legal Affairs and Assistant Secretary. From March 1997 to January 2000, Ms. Miller was a corporate associate with Stradling Yocca Carlson & Rauth, our outside counsel. From October 1995 to February 1997, Ms. Miller was a corporate associate with Keesal, Young & Logan. In Spring 1995, Ms. Miller completed an internship with the Securities and Exchange Commission. Ms. Miller received her B.S. in Business Administration in May 1987 and her Juris Doctorate in May 1995, both from the University of Southern California. Ms. Miller is admitted to practice law in the state of California and is a member of various bar associations. DANIEL J. SPIREK, 33, joined us in May 1997 as our Vice President, Supplemental Management Services. From June 1999 to January 2000, Mr. Spirek served as our Senior Vice President, Transformation Services Group (now known as Transformation Services). In February 2000, Mr. Spirek was promoted to Executive Vice President, Transformation Services. From July 1994 to May 1997, Mr. Spirek served as Vice President, Information Services for FHP/ PacifiCare, a managed care organization. Prior to July 1994, Mr. Spirek held various information technology management positions at TakeCare, Inc., a managed care organization, Comprecare, Inc., a managed care organization, and a consulting position at Andersen Consulting. Mr. Spirek received his B.S. degree in Information Management Systems from the University of Colorado in 1988. MICHAEL J. SUNDERLAND, 45, joined us as our Vice President of Finance, Chief Financial Officer and Secretary in May 1999. In August 1999, Mr. Sunderland was named as our Senior Vice President of Finance. From May 1998 to April 1999, Mr. Sunderland was an independent healthcare consultant. From March 1996 to May 1998, Mr. Sunderland served as the Vice President and Chief Financial Officer of Health Net, a California subsidiary of Foundation Health Systems, Inc., a managed care organization. From April 1994 to March 1996, Mr. Sunderland was the Chief Financial Officer of Diagnostic Imaging Systems, Inc., a publicly held medical imaging company. Prior to 1994, Mr. Sunderland held various executive and management positions in finance for Paragon Ambulatory Surgery, Inc., Care Enterprises, Inc., Shamrock Investments, American Medical International, Inc. and Coopers & Lybrand. Mr. Sunderland earned his B.S. degree in Accounting from Loyola Marymount University in 1977. Mr. Sunderland earned his State of California Certified Public Accountant certification in 1980. There are no family relationships between any director, executive officer or person nominated or chosen to be a director or executive officer. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership of, and transactions in, our securities with the Securities and Exchange Commission. Such directors, executive officers and 10% stockholders are also required to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of the copies of Forms 3, 4 and 5 and amendments thereto furnished to us, or written representations that no annual Form 5 reports were required, we believe that all filing requirements under Section 16(a) of the Exchange Act applicable to our directors, officers and any persons holding 10% or more of our common stock were made with respect to our fiscal year ended December 31, 1999. 37 39 ITEM 11 -- EXECUTIVE COMPENSATION The following table sets forth compensation earned during the two fiscal years ended December 31, 1998 and 1999 by our Chief Executive Officer, and our four other most highly compensated executive officers who were serving as executive officers at December 31, 1999 and whose total salary and bonus during such year exceeded $100,000 (collectively, the "Named Executive Officers"). Although the table does not reflect certain personal benefits, which in the aggregate are less than the lower of $50,000 or 10% of each Named Executive Officer's annual salary and bonus, Mr. Margolis' compensation includes $26,625 of loan forgiveness in 1999.
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS - --------------------------- ---- -------- -------- ------------ Jeffrey H. Margolis........................... 1999 $242,625 $175,000 -- Chairman of the Board, Chief 1998 $179,324 $100,000 300,000 Executive Officer and President Daniel J. Spirek.............................. 1999 $191,826 $105,000 -- Executive Vice President, 1998 $160,417 $101,000 100,000 Transformation Services Michael J. Sunderland......................... 1999 $126,010 $ 90,000 130,000 Senior Vice President of Finance, 1998 -- -- -- Chief Financial Officer and Secretary Kerry M. Kearns............................... 1999 $150,000 $ 20,000 170,000 Senior Vice President, ASP Providers 1998 -- -- -- Shawn P. Bowen................................ 1999 $127,952 $ 40,000 -- Vice President and Chief Technical 1998 $110,000 $ 20,000 12,500 Officer, Connectivity Services Group
OPTION GRANTS The following table sets forth certain information concerning grants of options to each of our Named Executive Officers during the fiscal year ended December 31, 1999. OPTION GRANTS IN LAST FISCAL YEAR
NUMBER PERCENTAGE POTENTIAL REALIZABLE VALUE AT OF OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------- NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10% - ---- ---------- ------------ --------- ---------- ------------- ------------- Jeffrey H. Margolis....... -- -- -- -- -- -- Daniel J. Spirek.......... -- -- -- -- -- -- Michael J. Sunderland..... 130,000 5% $0.50 4/30/09 $1,840,807 $2,969,679 Kerry M. Kearns........... 140,000 5% $0.25 1/04/09 $2,017,407 $3,233,115 30,000 1% $2.60 6/28/09 $ 361,802 $ 622,310 Shawn P. Bowen............ 12,500 <1% $6.50 8/20/09 $ 102,001 $ 210,546
The figures above represent options granted pursuant to our 1998 Stock Option Plan. We granted options to purchase 2,619,950 shares of common stock in 1999. All options were granted at an exercise price equal to the fair market value of the common stock on the date of grant, as determined by our Board. The options vest in 25% increments on each of the four annual anniversaries of the date of grant. The options listed above expire 10 years from the date of grant. 38 40 The potential realizable value represents amounts, net of exercise price before taxes, that may be realized upon exercise of the options immediately prior to the expiration of their terms assuming appreciation of 5% and 10% over the option term. The 5% and 10% are calculated based on rules promulgated by the SEC based upon the initial public offering price of $9 per share and do not reflect our estimate of future stock price growth. The actual value realized may be greater or less than the potential realizable value set forth in the table. Options granted have a term of 10 years, except for the options granted to Mr. Margolis, which have a term of 5 years. All options are subject to earlier termination in certain events related to termination of employment. All of these options vest in equal quarterly installments over four years, except for 30,000 of the options granted to Mr. Sunderland, which vest over a period of seven years unless accelerated to a four year vesting schedule based upon the attainment of certain goals. Based on fair market value, in accordance with the rules and regulations of the Securities and Exchange Commission, such gains are based on assumed rates of annual compound stock appreciation of 5% and 10% from the date on which the options were granted over the full term of the options. The rates do not represent our estimate or projection of future common stock prices, and no assurance can be given that the rates of annual compound stock appreciation assumed will be achieved. OPTIONS EXERCISED AND FISCAL YEAR-END OPTION VALUES No options were exercised by any of the Named Executive Officers during the year ended December 31, 1999. The following table sets forth the fiscal year end options values for all options held by TriZetto's Named Executive Officers. The values for "in the money" options represent the positive spread between the exercise prices of any such existing stock options and the fiscal year end price of TriZetto's Common Stock ($46.625 per share). AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE- UNDERLYING UNEXERCISED MONEY OPTIONS AT OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999 ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Jeffrey H. Margolis.................... 75,000 225,000 $3,476,250 $10,428,750 Daniel J. Spirek....................... 25,000 75,000 $1,159,375 $ 3,478,125 Michael J. Sunderland.................. -- 130,000 -- $ 5,996,250 Kerry M. Kearns........................ -- 170,000 -- $ 7,813,250 Shawn P. Bowen......................... 3,125 21,875 $ 144,922 $ 936,328
DIRECTORS' FEES Our directors do not receive any payments for their services on the Board, but they are reimbursed for various expenses incurred in connection with attendance at Board meetings. In connection with their election to our Board, Mr. LeFort and Mr. Fisher each received options to purchase 10,000 shares of our common stock. EMPLOYMENT AGREEMENTS We have an employment contract with Jeffrey H. Margolis. We do not have any other employment contracts with our named executive officers. Mr. Margolis' three year employment agreement dated April 30, 1998, provides for an annual base salary of $192,000 per year, which is to be reviewed annually by the Board. Currently, Mr. Margolis' annual salary is $275,000. Mr. Margolis is entitled to participate in a bonus plan as recommended by our compensation committee and approved by the Board. Mr. Margolis may participate in all employee benefit plans or programs generally available to our employees, and we will pay or reimburse Mr. Margolis for all reasonable and necessary out-of-pocket expenses he incurs in the performance of his duties. We loaned Mr. Margolis $100,000 and agreed 39 41 to forgive $25,000 of the principal amount, along with any accrued but unpaid interest on such forgiven amount, on each anniversary of the employment agreement if Mr. Margolis remains an employee. We granted this loan as a means of providing additional compensation to Mr. Margolis, while also providing incentive for his continued employment. If Mr. Margolis is terminated without cause or he voluntarily terminates for good reason, he is entitled to severance pay in the amount equal to his then current annual base salary. CHANGE IN CONTROL AGREEMENTS We have entered into Change in Control Agreements with each of our Section 16 executive officers. These agreements provide for severance and other benefits if, following a Change in Control of TriZetto, the executive's employment terminates in a way adverse to the executive. If a named executive officer's employment ends within one to three years following a Change in Control (term varies among executives) either because the Company terminates the executive without cause or because the executive resigns under circumstances constituting "good reason," the executive will be entitled to: - Bi-weekly salary through the end of the employment period; - medical, dental and life insurance coverage through the end of the employment period; - outplacement services consistent with the Company's outplacement policy, if any; - payment on the last day of the employment period in an amount equal to the sum of the additional contributions that would have been allocated to the Executive's 401(k) account, if any, if the Executive had remained employed through the end of the employment period; - payment within 30 days of the date of termination of all accrued vacation, holiday and personal leave days as of the date of termination; - payment of any unpaid incentive compensation that executive officer earned through the date of termination in accordance with the terms of any applicable incentive compensation plan; - acceleration of unvested options held by executives with Change in Control Agreements will accelerate, unless such acceleration will would trigger the "golden parachute" excise tax imposed by the U.S. Internal Revenue Code. In such case, the options will continue to vest as if the executive officer remained employed by us. A "Change in Control" is defined in the agreement to occur if a person becomes the beneficial owner of 50% or more of the combined voting power of our securities, if a majority of the Board changes without the specified approval of incumbent directors, if we merge with another entity in a way that substantially changes the ownership of existing stockholders, or if our stockholders approve a complete liquidation or dissolution. "Change in control" is also deemed to have occurred if executive's employment with us is terminated prior to the change in control and it is demonstrated that (a) such termination was at the request of a third party who has taken steps to effectuate the change in control; or (b) such termination arose in connection with or anticipation of the change in control. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of the following two non-employee directors: Donald J. Lothrop and Peter D. Mann. No executive officer serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or our Compensation Committee. REPORT OF THE COMPENSATION COMMITTEE The following report is submitted by the Compensation Committee with respect to the executive compensation policies established by the Compensation Committee for the fiscal year ended December 31, 1999. The Compensation Committee determines the annual salary, bonus and other benefits, including incentive compensation awards, of TriZetto's executive officers and key employees and recommends new employee benefit 40 42 plans and changes to existing plans to the Board. The salary of Mr. Margolis is determined in accordance with his Employment Agreement. During the year ended December 31, 1999, our Board, based upon the recommendations of the Compensation Committee, established the levels of compensation for our executive officers, provided, however, Mr. Margolis' compensation is determined in accordance with the terms and conditions of his Employment Agreement. COMPENSATION POLICIES AND OBJECTIVES. Our executive compensation policy is designed to attract and retain exceptional executives by offering compensation for superior performance that is highly competitive with other well-managed organizations. The Compensation Committee measures executive performance on an individual and corporate basis. There are three components to our executive compensation program, and each is consistent with the stated philosophy as follows: Base Salary. Base salaries for executives and other key employees are determined by individual financial and non-financial performance, position in salary range and general economic conditions of TriZetto. For purposes of administering base pay, all executive positions are evaluated and placed in appropriate salary grades. Salary range midpoint levels are reviewed on an annual basis to ensure competitiveness with a peer group of comparable companies. In recommending salaries for executive officers, the Compensation Committee (i) reviews the historical performance of the executives, and (ii) formally reviews specific information provided by its accountants and other consultants, as necessary, with respect to the competitiveness of salaries paid to our executives. Annual Bonus. Annual bonuses for executives and other key employees are tied directly to our financial performance as well as individual performance. The purpose of annual cash bonuses are to reward executives for achievements of corporate, financial and operational goals. Annual cash bonuses are intended to reward the achievement of outstanding performance. When certain objective and subjective performance goals are not met, annual bonuses would be reduced or not paid. The bonuses paid in fiscal year 1999 were based upon our financial performance and each individual's performance during the year. Long-Term Incentives. The purpose of these plans is to create an opportunity for executives and other key employees to share in the enhancement of stockholder value through stock options. The overall goal of this component of pay is to create a strong link between our management and our stockholders through management stock ownership and the achievement of specific corporate financial measures that result in the appreciation of our share price. Stock options are awarded and in some instances, vesting is accelerated, if our goals and individual goals are achieved or exceeded. The Compensation Committee generally has followed the practice of granting options on terms which provide that the options become exercisable in cumulative annual installments over a four year period. The Compensation Committee believes that this feature not only provides an employee retention factor but also makes longer term growth in share prices important for those receiving options. FISCAL YEAR 1999 COMPENSATION. We are required to disclose our policy regarding qualifying executive compensation deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended, which provides that, for purposes of the regular income tax and the alternative minimum tax, the otherwise allowable deduction for compensation paid or accrued with respect to a covered employee of a public corporation is limited to no more than $1 million per year. It is not expected that the compensation to be paid to any of our executive officers for fiscal 2000 will exceed the $1 million limit per officer. Our 1998 Stock Option Plan is structured so that any compensation deemed paid to an executive officer upon exercise of an outstanding option under the plan, with an exercise price equal to the fair market value of the option shares on the grant date, will qualify as performance-based compensation that will not be subject to the $1 million limitation. Respectfully submitted, Donald J. Lothrop Peter D. Mann 41 43 STOCK PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative stockholder return on TriZetto's Common Stock with the cumulative total return of (i) the Nasdaq Market Index, (ii) Media General Financial Services Industry Group Index 825 -- Healthcare Information Services, and (iii) Media General Financial Services Industry Group Index 852 -- Internet Software and Services, for the period that commenced October 8, 1999, the date on which TriZetto's Common Stock was first publicly traded on the Nasdaq National Market, and ended on December 31, 1999. The Performance Graph is not necessarily an indicator of future price performance. The graph assumes the reinvestment of all dividends. This information has been provided to TriZetto by Media General Financial Services.
10/08/99 10/31/99 11/30/99 12/31/99 -------- -------- -------- -------- The Trizetto Group, Inc. 100.00 111.11 238.89 518.06 MG Healthcare Info Services Index 100.00 89.63 109.96 130.67 Nasdaq Market Index 100.00 107.74 120.49 147.32 MG Internet Software & Services Index 100.00 104.02 133.52 168.80
42 44 ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS Set forth below is certain information as of February 29, 2000 regarding the beneficial ownership of our Common Stock by (i) any person who was known by us to own more than five percent of our the voting securities, (ii) all directors and nominees, (iii) each of the Named Executive Officers identified in the Summary Compensation Table, and (iv) all current directors and executive officers as a group.
AMOUNT AND NATURE OF BENEFICIAL NAME AND ADDRESS BENEFICIAL OWNERS(1) OWNERSHIP(2) % OF CLASS - ------------------------------------- ----------------- ---------- Raymond D. Croghan.......................................... 3,157,681(3) 15% 370 Interlocken Blvd. 4(th) Floor Broomfield, CO 80021 Delphi Ventures IV, L.P..................................... 2,736,014 13% Delphi BioInvestments IV, L.P. 3000 Sand Hill Road Building One, Suite 135 Menlo Park, CA 94025 Fidelity Ventures Limited................................... 1,289,336 6% 82 Devonshire Street, R25C Boston, MA 02109-3614 Fidelity Investors Limited Partnership...................... 1,289,336 6% Fidelity Investors II Limited Partnership 82 Devonshire Street, R25C Boston, MA 02109-3614 Jeffrey H. Margolis(4)...................................... 2,685,000 13% Donald J. Lothrop (5)....................................... 2,736,014 13% Peter D. Mann(6)............................................ 1,289,336 6% William E. Fisher(7)........................................ 422,595 2% Paul F. LeFort(8)........................................... 60,000 <1% Daniel J. Spirek(9)......................................... 325,000 2% Michael J. Sunderland....................................... 5,000 <1% Kerry M. Kearns............................................. 38,000 <1% Shawn Bowen(10)............................................. 253,125 1% All executive officers and directors as a group (16 persons)(11).......................................... 8,298,370 39%
- --------------- (1) Unless otherwise indicated, the business address of such stockholder is c/o The TriZetto Group, Inc., 567 San Nicolas Drive, Suite 360, Newport Beach, California 92660. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days of February 29, 2000, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (3) Includes 100,000 shares held by the Raymond D. Croghan Charitable Remainder Trust, Raymond D. Croghan, Trustee. 550,000 of these shares are subject to an option granted by Mr. Croghan to Mr. Margolis, with a term of five years and an exercise price of $6.50 per share. 43 45 (4) 1,760,000 shares are held by Jeffrey H. Margolis and his wife, in their capacities as trustees of the Margolis Family Trust, over which the trustees have shared voting power. 300,000 shares are held in two additional trusts over which Mr. Margolis has sole voting power and Mr. Margolis disclaims beneficial ownership in 150,000 of such shares. Includes options for 550,000 shares of common stock granted by Mr. Croghan to Mr. Margolis, which are exercisable within 60 days of February 29, 2000. Also includes Mr. Margolis' options for 75,000 shares of common stock, which are exercisable within 60 days of February 29, 2000. (5) Consists of 2,736,014 shares held by Delphi Ventures IV, L.P. and Delphi BioInvestments IV, L.P. Mr. Lothrop is a Managing Member of Delphi Management Partners IV, LLC, the general partner of Delphi Ventures IV, L.P. and Delphi BioInvestments IV, L.P., and disclaims beneficial ownership of the 2,736,014 shares except to the extent of his pecuniary interest. Mr. Lothrop's business address is the same as that of Delphi. (6) Consists of 1,289,336 shares held by Fidelity Ventures Limited. Mr. Mann is a Vice President of the general partner of Fidelity Ventures and disclaims beneficial ownership of the 1,289,336 shares. Mr. Mann's business address is the same as that of Fidelity. (7) Includes options for 10,000 shares of common stock which are exercisable within 60 days of February 29, 2000. Also includes 162,595 shares of common stock held by KFS Management, Inc. Mr. Fisher owns 50% of the issued and outstanding stock of KFS and is an officer and director of KFS. (8) Includes options for 10,000 shares of common stock, which are exercisable within 60 days of February 29, 2000. (9) Includes options for 25,000 shares of common stock, which are exercisable within 60 days of February 29, 2000. (10) Includes options for 3,125 shares of common stock, which are exercisable within 60 days of February 29, 2000. (11) Includes options for 130,625 shares of common stock, which are exercisable within 60 days of February 29, 2000. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS KFS WARRANTS. On September 1, 1997, Croghan & Associates issued a promissory note in the principal amount of $520,000 to KFS Management, Inc. In connection with this promissory note, Croghan & Associates issued KFS Management, Inc. warrants to purchase 243,893 shares of Croghan & Associates common stock at $0.53 per share. When we acquired Croghan & Associates, we agreed to convert these warrants into warrants to purchase 162,595 shares of our common stock at $0.80 per share. KFS exercised its warrants on August 2, 1999. One of our directors, William Fisher, owns 50% of the issued and outstanding stock of KFS and is an officer and director of KFS. The value of the warrants, which was not deemed material, was determined using the Black Scholes valuation model, a fair value option-pricing model. SERIES B FINANCING. On April 12, 1999, we issued an aggregate of 1,730,770 shares of Series B Preferred Stock for $2.60 per share. Of the 1,730,770 shares of preferred stock sold by us, 769,232 shares were sold to the following principal stockholders for an aggregate purchase price of $2,000,003.
NUMBER AGGREGATE PURCHASER OF SHARES PURCHASE PRICE - --------- --------- -------------- Delphi Ventures IV, L.P..................................... 282,635 $734,851 Delphi BioInvestments IV, L.P............................... 5,827 $ 15,150 Fidelity Ventures Limited................................... 240,385 $625,001 Fidelity Investors II Limited Partnership................... 240,385 $625,001
In connection with the sale of these shares, the Delphi entities agreed to vote their shares to elect a designee of the Fidelity entities to our Board and the Fidelity entities agreed to vote their shares to elect a designee of the 44 46 Delphi entities. Donald Lothrop currently serves as the Delphi entities' designee and Peter Mann currently serves as the Fidelity entities' designee. MARGOLIS $100,000 NOTE. In connection with Mr. Margolis' employment agreement, dated April 30, 1998, we loaned Mr. Margolis $100,000 in exchange for a promissory note in the principal sum of $100,000, bearing interest at 6.5% per year. We forgave $25,000 of the principal amount of this note and the related interest on April 30, 1999 and shall forgive an additional $25,000 and the related interest on each of the next three anniversaries of Mr. Margolis' employment agreement, so long as Mr. Margolis remains our employee. The entire sum of principal and interest of the note is due on April 30, 2002, and is immediately due if Mr. Margolis commits any act of default as described in the note. MARGOLIS $200,000 NOTE. In June 1998, we loaned Mr. Margolis $200,000 in exchange for a promissory note in the principal sum of $200,000, bearing an interest rate of 8% per year. The entire sum of principal and interest of the note was due on June 15, 1999. The note was secured by 200,000 shares of our common stock. On May 21, 1999, we repurchased 200,000 shares of common stock owned by Mr. Margolis in exchange for the note. CROGHAN $500,000 NOTE. In October 1998, we loaned Mr. Croghan $500,000 in exchange for a promissory note in the principal sum of $500,000, bearing an interest rate of 8% per year. The entire sum of principal and interest of the note was due on October 26, 1999. The note was secured by 362,319 shares of our common stock. On June 30, 1999, we repurchased 362,319 shares of common stock by Mr. Croghan in exchange for the note. GARTE & ASSOCIATES, INC. In 1999, we entered into an agreement with Garte & Associates, Inc. pursuant to which we would pay Garte &Associates, Inc. an investment banking fee for certain acquisitions. In 1999, we paid a total of $256,000 to Garte & Associates, Inc. in connection with our acquisitions of Novalis Corporation and Finserv Health Care Systems, Inc. in late 1999. Harvey Garte, our Vice President of Corporate Development and Investor Relations, is the sole stockholder of Garte & Associates, Inc. FUTURE TRANSACTIONS. Any future transactions between TriZetto and its officers, directors or affiliates will either be on terms no less favorable to TriZetto than could be obtained from third parties, will be subject to approval by a majority of TriZetto's outside directors or will be consistent with policies approved by a majority of such outside directors. 45 47 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) List of documents filed as part of this Form 10-K: 1. FINANCIAL STATEMENTS See Index to Financial Statements and Schedule on page F-1 2. FINANCIAL STATEMENT SCHEDULES See Index to Financial Statements and Schedule on page F-1 3. EXHIBITS The following exhibits are filed (or incorporated by reference herein) as part of this Form 10-K:
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 Exchange Agreement, dated October 1, 1997, by and among M.C. Health Holdings, Inc. and the stockholders of Croghan & Associates, Inc. and stockholders of Margolis Health Enterprises, Inc. (Incorporated by reference to Exhibit 2.1 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 2.2+ Stock Purchase Agreement, dated February 5, 1999 by and among TriZetto, Creative Business Solutions, Inc. and the stockholders of Creative Business Solutions, Inc. (Incorporated by reference to Exhibit 2.2 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 2.3+ Partnership Interest Purchase Agreement, dated February 5, 1999, by and between TriZetto, TriZetto Acquisition Group, LLC, HealthWeb Systems, Ltd, HealthWeb General Partner, Inc. and the holders of partnership interests (Incorporated by reference to Exhibit 2.3 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 2.4 Asset Purchase Agreement, dated April 1,1999, between TriZetto and Management Technology Solutions, Inc. (Incorporated by reference to Exhibit 2.4 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 2.5+ Information Technology Services Agreement, dated May 1, 1999, between TriZetto and MedPartners, Inc. (Incorporated by reference to Exhibit 2.5 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 2.6 Escrow Agreement, dated February 15, 1999, by and among TriZetto and the stockholders of Creative Business Solutions, Inc. (Incorporated by reference to Exhibit 2.6 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 6, 1999, File No. 333-84533) 2.7 Escrow Agreement, dated February 5, 1999, by and among TriZetto and the holders of partnership interests in HealthWeb (Incorporated by reference to Exhibit 2.7 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 6, 1999, File No. 333-84533) 2.8 Stock Purchase Agreement, dated November 29, 1999, by and among TriZetto, Novalis Corporation, the Novalis Noteholders described therein, and the Novalis Stockholders described therein (Incorporated by reference to Exhibit 2.1 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501)
46 48 2.9 Offset Escrow Agreement, dated as of November 29, 1999, by and among TriZetto, the Novalis Securityholders described therein, ABS Capital Partners, Inc., as Representative, and Bankers Trust Company of California, N.A., as Escrow Agent (Incorporated by reference to Exhibit 2.2 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.10 Registration Rights Agreement, dated as of November 29, 1999, by and among TriZetto and certain TriZetto stockholders (Incorporated by reference to Exhibit 2.3 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.11 Form of Promissory Note as executed by certain Novalis Securityholders in favor of Novalis Corporation (Incorporated by reference to Exhibit 2.4 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.12 Warrant and Warrant Assignment, dated as of November 29, 1999, issued by QCA Health Plan, Inc. in favor of Silavon, Inc. and assigned to TriZetto (Incorporated by reference to Exhibit 2.5 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.13 Non-Competition Agreement, dated as of November 29, 1999, by and between TriZetto and Chester E. Burrell (Incorporated by reference to Exhibit 2.6 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.14 Warrant Escrow Agreement, dated as of November 29, 1999, by and among TriZetto, the Novalis Securityholders described therein, Silavon, Inc., ABS Capital Partners, Inc., as Representative, and Stradling Yocca Carlson & Rauth, as Escrow Agent (Incorporated by reference to Exhibit 2.7 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.15 Form of Stock Pledge Agreement entered into by and between Novalis Corporation and certain Novalis Securityholders (Incorporated by reference to Exhibit 2.8 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.16 Agreement and Plan of Merger, dated as of December 22, 1999, by and among TriZetto, Finserv Acquisition Corp., Finserv Health Care Systems, Inc., and the Finserv Securityholders described therein (Incorporated by reference to Exhibit 2.1 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501) 2.17 Escrow Agreement, dated as of December 22, 1999, by and among TriZetto, the Finserv Securityholders described therein, Stuart Schloss, as Representative, and Bankers Trust Company of California, N.A., as Escrow Agent (Incorporated by reference to Exhibit 2.2 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501) 2.18 Form of Non-Competition Agreement, dated as of December 22, 1999, as entered into by and between TriZetto and certain employees (Incorporated by reference to Exhibit 2.3 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501) 2.19 Registration Rights Agreement, dated as of December 22, 1999, by and among TriZetto and certain TriZetto stockholders (Incorporated by reference to Exhibit 2.4 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501)
47 49 3.1 Amended and Restated Certificate of Incorporation of TriZetto, as filed with the Delaware Secretary of State effective as of April 8, 1999 (Incorporated by reference to Exhibit 3.1 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 3.2 Form of Amended and Restated Certificate of Incorporation of TriZetto, as filed with the Delaware Secretary of State effective as of October 14, 1999 (Incorporated by reference to Exhibit 3.2 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on September 14, 1999, File No. 333-84533) 3.3 Amended and Restated Bylaws of TriZetto, effective as of April 29, 1998 (Incorporated by reference to Exhibit 3.3 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 3.4 Amended and Restated Bylaws of TriZetto effective as of October 7, 1999 (Incorporated by reference to Exhibit 3.4 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 4.1 Specimen common stock certificate (Incorporated by reference to Exhibit 4.1 of TriZetto's Registration Statement on Form S-1/A as filed with the Securities and Exchange Commission on September 14, 1999, File No. 333-84533) 10.1* 1998 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.2* Form of 1998 Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.2 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.3* Form of 1998 Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.3 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.4* 1999 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.4 of TriZetto's Registration Statement on Form S-1/A as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.5* Employment Agreement, dated April 30, 1998, by and between TriZetto and Jeffrey H. Margolis (Incorporated by reference to Exhibit 10.5 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.6 Promissory Note, dated April 30, 1998, by and between TriZetto and Jeffrey H. Margolis (Incorporated by reference to Exhibit 10.6 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.7 Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.7 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.8 First Amended and Restated Investor Rights Agreement, dated April 9, 1999 by and among Raymond Croghan, Jeffrey Margolis, TriZetto, and Series A and Series B Preferred Stockholders (Incorporated by reference to Exhibit 10.8 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533)
48 50 10.9+ Professional Services Agreement, dated January 1, 1999, by and between TriZetto and CCN Managed Care, Inc. (Incorporated by reference to Exhibit 10.9 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 10.10 Office Lease Agreement, dated April 26, 1999, between St. Paul Properties, Inc. and TriZetto (including addendum) (Incorporated by reference to Exhibit 10.10 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.11 Sublease Agreement, dated December 18, 1998, between TPI Petroleum, Inc. and TriZetto (including underlying Office Lease Agreement by and between St. Paul Properties, Inc. and Total, Inc.) (Incorporated by reference to Exhibit 10.11 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.12 Sublease Agreement, dated May 1, 1999, between MedPartners, Inc. and TriZetto (including underlying Lease by and between Riverchase Tower, Ltd. And MedPartners, Inc.) (Incorporated by reference to Exhibit 10.12 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.13+ Technical Support Agreement, dated May 15, 1995, between DHI Computing Services, Inc. and Croghan & Associates, Inc. (Incorporated by reference to Exhibit 10.13 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.14+ Standard Multi-Directory and Support Agreement, dated May 25, 1999, between TriZetto and Epic Systems Corporation (Incorporated by reference to Exhibit 10.14 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 10.15+ Master Software License Agreement, dated May 1, 1999, between Medic Computer Systems, Inc. and TriZetto (Incorporated by reference to Exhibit 10.15 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 6, 1999, File No. 333-84533) 10.16+ Addendum to the Master License Agreement, dated April 15, 1999, between Medical Manager Midwest, Inc. and Management and Technology Solutions, Inc. (including underlying Medical Manager License Agreement between Medical Manager Midwest, Inc. and Management and Technology Solutions, Inc.) (Incorporated by reference to Exhibit 10.16 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.17+ Technical Infrastructure Maintenance Agreement, dated March 1, 1998, between Medical Manager Midwest, Inc. and Management and Technology Solutions, Inc. (Incorporated by reference to Exhibit 10.17 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.18 North American Partner Agreement, dated May 26, 1999, between Great Plains Software and TriZetto (Incorporated by reference to Exhibit 10.18 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.19 Form of Restricted Stock Purchase Agreement between TriZetto and certain employees (Incorporated by reference to Exhibit 10.19 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533)
49 51 10.20 Bank One Credit Facility (including Promissory Note, Loan Agreement and Commercial Security Agreement) dated March 4, 1999 (Incorporated by reference to Exhibit 10.20 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.21 Bank One Credit Facility (including Promissory Note, Loan Agreement and Commercial Security Agreement), dated October 27, 1999 10.22 First Modification and Ratification of Lease, dated November 1, 1999, by and between TriZetto and St. Paul Properties, Inc. 10.23 Second Modification and Ratification of Lease, dated December 1999, by and between TriZetto and St. Paul Properties, Inc. 10.24 Bank One Master Lease Agreement and related Security Agreement, dated December 1999 21.1 Current Subsidiaries of TriZetto. 23.1 Consent of PricewaterhouseCoopers LLP with respect to the financial statements of TriZetto. 27.1 Financial Data Schedule.
* This exhibit is identified as a management contract or compensatory plan or arrangement of TriZetto pursuant to Item 14(a) of Form 10-K. + Portions of this exhibit are omitted and were filed separately with the SEC pursuant to TriZetto's confidential treatment requests under Rule 406 of the Securities Act of 1933. (B) REPORTS ON FORM 8-K. On December 14, 1999, the registrant filed a Form 8-K (Item 2) relating to its acquisition of all the issued and outstanding capital stock of Novalis Corporation. The financial statements of the business acquired and the proforma financial information were filed on Form 8-K/A in the first quarter of 2000. 50 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 30, 2000. THE TRIZETTO GROUP, INC. /s/ JEFFREY H. MARGOLIS By: -------------------------------------- Jeffrey H. Margolis President, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JEFFREY H. MARGOLIS President, Chief Executive Officer and March 30, 2000 - --------------------------------------- Chairman Jeffrey H. Margolis of the Board (Principal executive officer.) /s/ MICHAEL J. SUNDERLAND Senior Vice President of Finance, Chief March 30, 2000 - --------------------------------------- Financial Officer and Secretary (Principal Michael J. Sunderland financial and accounting officer.) /s/ DONALD J. LOTHROP Director March 30, 2000 - --------------------------------------- Donald J. Lothrop /s/ PETER D. MANN Director March 30, 2000 - --------------------------------------- Peter D. Mann Director - --------------------------------------- William E. Fisher /s/ PAUL F. LEFORT Director March 30, 2000 - --------------------------------------- Paul F. LeFort
51 53 THE TRIZETTO GROUP, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Balance Sheets -- December 31, 1999 and 1998... F-3 Consolidated Statements of Operations*...................... F-4 Consolidated Statement of Stockholders' Equity (Deficit)*... F-5 Consolidated Statements of Cash Flows*...................... F-6 Notes to Consolidated Financial Statements.................. F-7 Financial Statement Schedule -- Valuation and Qualifying Accounts.................................................. F-22
* For the years ended December 31, 1999 and 1998, and the period from May 27, 1997 (date of inception) to December 31, 1997. F-1 54 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The TriZetto Group, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1) on page 48 present fairly, in all material respects, the financial position of The TriZetto Group, Inc. and its subsidiaries at December 31, 1999 and 1998 and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998 and for the period from May 27, 1997 (date of inception) to December 31, 1997, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 48 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP San Jose, California February 16, 2000 F-2 55 THE TRIZETTO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ----------------- 1999 1998 ------- ------ ASSETS: Current assets: Cash and cash equivalents................................. $18,849 $3,681 Short-term investments.................................... 5,957 -- Accounts receivable, less allowance for doubtful accounts of $597 and $204, respectively.......................... 8,228 3,083 Note receivable from related party........................ 25 25 Prepaid expenses and other current assets................. 1,776 194 Income tax receivable..................................... 440 406 Deferred taxes............................................ -- 191 ------- ------ Total current assets.................................... 35,275 7,580 Property and equipment, net............................... 10,797 989 Long-term investments..................................... 1,230 -- Other assets.............................................. 265 40 Note receivable from related party........................ 525 75 Goodwill and other intangible assets, net................. 20,326 36 ------- ------ Total assets............................................ $68,418 $8,720 ======= ====== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Short-term note payable................................... $ 623 $ 52 Capital lease obligations, current........................ 1,234 28 Accounts payable.......................................... 3,102 95 Accrued liabilities....................................... 9,172 1,815 Income taxes payable...................................... 22 -- Deferred revenue.......................................... 241 -- ------- ------ Total current liabilities............................... 14,394 1,990 Long-term notes payable................................... 504 -- Capital lease obligations................................. 2,224 125 Note payable to related party............................. -- 520 Deferred taxes............................................ -- 377 ------- ------ Total liabilities....................................... 17,122 3,012 ------- ------ Commitments (Note 6) Mandatorily redeemable convertible preferred stock: $0.001 par value; Shares authorized: 10,392 Shares issued and outstanding: none in 1999 and 4,545 in 1998.................................................... -- 6,449 ------- ------ Stockholders' equity (deficit): Common stock: $0.001 par value; Shares authorized: 30,000 Shares issued and outstanding: 20,923 in 1999 and 9,217 in 1998.................................................... 20 9 Additional paid-in capital.................................. 66,215 940 Notes receivable from stockholders.......................... (41) (741) Deferred stock compensation................................. (5,786) (460) Accumulated deficit......................................... (9,112) (489) ------- ------ Total stockholders' equity (deficit)...................... 51,296 (741) ------- ------ Total liabilities, mandatorily redeemable convertible preferred stock and stockholders' equity (deficit)................. $68,418 $8,720 ======= ======
F-3 56 THE TRIZETTO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIOD FOR THE YEAR ENDED FROM MAY 27, 1997 ---------------------------- (DATE OF INCEPTION) DECEMBER 31, DECEMBER 31, TO DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------------- (IN THOUSANDS) Revenues: Recurring revenue............................ $19,448 $ 5,300 $1,191 Non-recurring revenue........................ 13,478 6,131 1,328 ------- ------- ------ Total revenues................................. 32,926 11,431 2,519 ------- ------- ------ Cost of revenues: Recurring revenue............................ 17,057 3,967 1,250 Non-recurring revenue........................ 9,751 3,490 422 ------- ------- ------ Total cost of revenues......................... 26,808 7,457 1,672 ------- ------- ------ Gross profit................................... 6,118 3,974 847 ------- ------- ------ Operating expenses: Research and development..................... 2,371 1,083 -- Selling, general and administrative.......... 9,694 2,885 672 Amortization of deferred stock compensation.............................. 1,057 22 -- Write-off of acquired in-process technology................................ 1,407 -- -- ------- ------- ------ Total operating expenses.................. 14,529 3,990 672 ------- ------- ------ Income (loss) from operations.................. (8,411) (16) 175 Interest income................................ 527 210 15 Interest expense............................... (256) (52) (13) ------- ------- ------ Income (loss) before provision for income taxes..................................... (8,140) 142 177 Provision for (benefit of) income taxes........ (213) 82 74 ------- ------- ------ Net income (loss)............................ $(7,927) $ 60 $ 103 ======= ======= ====== Net income (loss) per share: Basic........................................ $ (0.85) $ 0.01 $ 0.05 ======= ======= ====== Diluted...................................... $ (0.85) $ 0.00 $ 0.03 ======= ======= ====== Shares used in computing net income (loss) per share: Basic........................................ 9,376 4,937 2,065 ======= ======= ====== Diluted...................................... 9,376 12,783 4,074 ======= ======= ======
F-4 57 THE TRIZETTO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM MAY 27, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999 (IN THOUSANDS)
NOTES RETAINED TOTAL COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED EARNINGS STOCKHOLDERS' --------------- PAID-IN FROM STOCK (ACCUMULATED EQUITY SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) (DEFICIT) ------ ------ ---------- ------------ ------------ ------------ ------------- Issuance of common stock.............. 2,500 $ 3 $ 13 $ -- $ -- $ -- $ 16 Issuance of common stock for services rendered............................ 1,217 1 7 -- -- -- 8 Issuance of common stock for purchase of Croghan & Associates, Inc........ 5,801 6 430 -- -- -- 436 Issuance of common stock for note receivable.......................... 175 -- 13 (13) -- -- -- Net income............................ -- -- -- -- -- 103 103 ------ --- ------- ---- ------- ------- ------- Balance, December 31, 1997............ 9,693 10 463 (13) -- 103 563 Issuance of common stock.............. 75 -- 9 -- -- -- 9 Issuance of common stock for note receivable.......................... 390 -- 53 (53) -- -- -- Repurchase of common stock............ (941) (1) (67) -- -- (652) (720) Payments on notes receivable.......... -- -- -- 25 -- -- 25 Notes issued to stockholders.......... -- -- -- (700) -- -- (700) Deferred stock compensation........... -- -- 482 -- (482) -- -- Amortization of deferred stock compensation........................ -- -- -- -- 22 -- 22 Net income............................ -- -- -- -- -- 60 60 ------ --- ------- ---- ------- ------- ------- Balance, December 31, 1998............ 9,217 9 940 (741) (460) (489) (741) Issuance of common stock to purchase Creative Business Solutions, Inc. and HealthWeb Systems, Ltd.......... 655 1 1,145 -- -- -- 1,146 Issuance of common stock to purchase assets of Management & Technology Solutions, Inc...................... 60 -- 140 -- -- -- 140 Issuance of common stock for purchase of Novalis Corporation.............. 549 1 8,999 -- -- -- 9,000 Issuance of common stock for purchase of Finserv Health Care Systems, Inc................................. 49 -- 1,499 -- -- -- 1,499 Repurchase of common stock in exchange of notes receivable from stockholders........................ (563) (1) (3) 700 -- (696) -- Deferred stock compensation........... -- -- 6,383 -- (6,383) -- -- Amortization of deferred stock compensation........................ -- -- -- -- 1,057 -- 1,057 Stock compensation.................... -- -- 53 -- -- -- 53 Repurchase common stock............... (6) -- -- -- -- -- -- Exercise of common stock options and warrants............................ 206 -- 141 -- -- -- 141 Issuance of common stock related to initial public offering, net........ 4,480 4 35,992 -- -- -- 35,996 Conversion of preferred stock to common stock........................ 6,276 6 10,926 -- -- -- 10,932 Net loss.............................. -- -- -- -- -- (7,927) (7,927) ------ --- ------- ---- ------- ------- ------- Balance, December 31, 1999............ 20,923 $20 $66,215 $(41) $(5,786) $(9,112) $51,296 ====== === ======= ==== ======= ======= =======
F-5 58 THE TRIZETTO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD FOR THE YEAR ENDED FROM MAY 27, 1997 ---------------------------- (DATE OF INCEPTION) DECEMBER 31, DECEMBER 31, TO DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................... $ (7,927) $ 60 $ 103 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts................... 505 203 204 Common stock issued for services rendered......... -- -- 8 Amortization of deferred stock compensation....... 1,057 22 -- Write-off of acquired in-process technology....... 1,407 -- -- Forgiveness of note receivable.................... 32 -- -- Stock compensation................................ 53 -- -- Deferred taxes.................................... (186) (83) (105) Loss on disposal of property and equipment........ -- 187 130 Depreciation and amortization..................... 2,415 161 24 Changes in assets and liabilities: Accounts receivable............................... (3,080) (2,127) (762) Prepaid expenses and other current assets......... (1,271) (75) (99) Income tax receivable............................. (34) (406) -- Accounts payable.................................. 1,364 32 (128) Accrued liabilities............................... 2,604 976 614 Deferred revenue.................................. 241 (248) 247 Other long-term assets............................ (181) (16) -- -------- ------- ----- Net cash provided by (used in) operating activities........................................ (3,001) (1,314) 236 -------- ------- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term and long-term investments.... (7,187) -- -- Purchase of property and equipment and software licenses.......................................... (3,208) (750) (121) Purchase of MedPartners' assets..................... (2,630) -- -- Acquisitions, net of cash acquired.................. (7,338) -- 614 -------- ------- ----- Net cash provided by (used in) investing activities...................................... (20,363) (750) 493 -------- ------- ----- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net......... 35,996 9 16 Proceeds from issuance of mandatorily redeemable convertible preferred stock, net.................. 4,483 6,449 -- Repurchases of common stock......................... -- (720) -- Proceeds from issuance of notes payable............. -- 56 86 Payments of notes payable........................... (1,275) (32) (58) Payment on line of credit........................... (265) -- -- Principal payments on capital leases................ (448) (15) -- Issuance of notes receivable........................ -- (800) -- Repayment of notes receivable....................... 30 25 -- Employee exercise of stock options.................. 11 -- -- -------- ------- ----- Net cash provided by financing activities......... 38,532 4,972 44 -------- ------- ----- Net increase in cash and cash equivalents........... 15,168 2,908 773 Cash and cash equivalents at beginning of period.... 3,681 773 -- -------- ------- ----- Cash and cash equivalents at end of period.......... $ 18,849 $ 3,681 $ 773 ======== ======= =====
F-6 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FORMATION AND BUSINESS OF THE COMPANY The TriZetto Group, Inc. (the "Company"), was incorporated in the state of Delaware on May 27, 1997. The Company is a provider of remotely hosted software applications, both third party packaged and proprietary software, and related services used in the healthcare industry. The Company also offers an Internet browser application that serves as a portal for the exchange of healthcare information and services over the Internet. The Company provides access to its hosted applications either through the Internet or through traditional networks. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of credit risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited in demand and money market accounts in three financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company's accounts receivable are derived from revenue earned from customers located in the United States. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of individual accounts. The following tables summarize the revenues and accounts receivable balances from customers in excess of 10% of total revenues and total accounts receivable balances, respectively:
FOR THE PERIOD YEAR ENDED FROM MAY 27, 1997 DECEMBER 31, (DATE OF INCEPTION) ------------ TO DECEMBER 31, 1999 1998 1997 ---- ---- ------------------- REVENUES: Company A................................................ 16% 42% 40% Company B................................................ 0% 11% 16% Company C................................................ 19% 0% 0%
DECEMBER 31, -------------------- 1999 1998 1997 ---- ---- ---- ACCOUNTS RECEIVABLE: Company A................................................. 0% 56% 40% Company B................................................. 0% 0% 20% Company C................................................. 0% 0% 13% Company D................................................. 13% 0% 0%
F-7 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Fair value of financial instruments Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value. Cash and cash equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents include money market funds and various deposit accounts. Investments At December 31, 1999, short-term investments consisted of debt securities with original maturities between three months and one year when purchased. Investments with original maturities greater then one year from the date of purchase have been classified as long-term investments. The Company has determined that all of its debt securities should be classified as available-for-sale. The difference between the cost basis and the market value of the Company's investments was not material at December 31, 1999. The Company's investments at December 31, 1999 primarily consisted of corporate bonds and debt. Long-term investments of $1.2 million mature during 2001. Property and equipment Property and equipment are stated at cost and are depreciated on a straight-line basis over their estimated useful lives of five to seven years. Leasehold improvements are amortized over their estimated useful lives, or the lease term if shorter. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred. Goodwill and other intangible assets Intangible assets arose from the Company's acquisitions. Goodwill is being amortized on a straight-line basis over five to seven years. Other intangible assets consist of acquired work force, customer lists and core technology which are being amortized on a straight-line basis over their estimated useful lives of two to four, five and three years, respectively. Software technology rights are amortized on a straight-line basis over the lesser of the contract term or five years. Long-lived assets Long-lived assets and certain intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the asset's carrying amount to future net undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. Revenue recognition Recurring revenue, or multi-year contractually based revenue, is recognized monthly based upon volume of service transactions. Non-recurring revenue is generally billed on a time and materials basis, and is recognized as the non-recurring services are performed. Provisions for estimated losses on fixed fee contracts are recorded when identified. F-8 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Research and development Research and development costs are charged to operations as incurred. Income taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. Computation of income (loss) per share Basic earnings per share ("EPS") is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The following is a reconciliation of the numerator (net income (loss)) and the denominator (number of shares) used in the basic and diluted EPS calculations (in thousands, except per share data):
FOR THE PERIOD YEAR ENDED FROM MAY 27, 1997 DECEMBER 31, (DATE OF INCEPTION) ------------------ TO DECEMBER 31, 1999 1998 1997 ------- ------- ------------------- BASIC: Net income (loss)................................... $(7,927) $ 60 $ 103 Weighted average common shares outstanding.......... 9,376 4,937 2,065 Net income (loss) per share......................... $ (0.85) $ 0.01 $ 0.05 ======= ======= ====== DILUTED: Net income (loss)................................... $(7,927) $ 60 $ 103 ------- ------- ------ Weighted average common shares outstanding.......... 9,376 4,937 2,065 Preferred stock..................................... -- 2,888 -- Options to purchase common stock.................... -- 305 -- Common stock subject to repurchase.................. -- 4,640 2,009 Warrants............................................ -- 13 -- ------- ------- ------ Total weighted common stock and common stock equivalents...................................... 9,376 12,783 4,074 ------- ------- ------ Net income (loss) per share......................... $ (0.85) $ 0.00 $ 0.03 ======= ======= ====== ANTIDILUTIVE SECURITIES: Contingently issuable shares........................ 518 -- -- Options to purchase common stock.................... 2,207 -- -- Common stock subject to repurchase.................. 1,698 -- -- Warrants............................................ -- -- 163 ------- ------- ------ 4,423 -- 163 ======= ======= ======
Comprehensive income The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive Income." SFAS 130 establishes standards for reporting and display of comprehensive F-9 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) income and its components for general-purpose financial statements. Comprehensive income is defined as net income plus all revenues, expenses, gains and losses from non-owner sources that are excluded from net income in accordance with generally accepted accounting principles. For all periods presented, there were no material differences between comprehensive and net income. Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ("SFAS 133"), Accounting for Derivative Instruments and Hedging activities. SFAS 133 establishes methods of accounting and reporting for derivative instruments and hedging activities related to those instruments as well as other hedging activities, and is effective for all fiscal quarters for all fiscal years beginning after June 15, 2000, as amended by SFAS 137. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. To date, we have not engaged in derivative and hedging activities. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. We believe that adopting SAB 101 will not have a material impact on our financial position or results of operations. 3. BALANCE SHEET ACCOUNTS
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 --------- -------- PROPERTY AND EQUIPMENT Computer equipment........................................ $ 7,166 $ 633 Furniture and fixtures.................................... 1,607 138 Equipment................................................. 841 191 Software.................................................. 2,401 142 Leasehold improvements.................................... 187 24 ------- ------ 12,202 1,128 Less: Accumulated depreciation and amortization............. (1,405) (139) ------- ------ $10,797 $ 989 ======= ======
Included in property and equipment at December 31, 1999 and December 31, 1998 is equipment acquired under capital leases totaling approximately $4.1 million and $167,000, respectively, and related accumulated amortization of $538,000 and $17,000, respectively. F-10 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 --------- -------- INTANGIBLE ASSETS Software licenses......................................... $ 2,707 $ 54 Goodwill.................................................. 8,272 -- Acquired workforce........................................ 1,687 -- Customer lists............................................ 4,184 -- Core technology........................................... 4,527 -- ------- ------ 21,377 54 Less: Accumulated amortization.............................. (1,051) (18) ------- ------ $20,326 $ 36 ======= ======
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 -------- -------- ACCRUED LIABILITIES Accrued payroll and benefits.............................. $4,080 $1,285 Accrued professional fees................................. 477 234 Accrued acquisition expenses.............................. 2,445 -- Other..................................................... 2,170 296 ------ ------ $9,172 $1,815 ====== ======
4. NOTES PAYABLE AND LINE OF CREDIT In December 1998, the Company entered into a financing agreement for approximately $56,000 relating to premiums for business insurance. The amount is due in nine monthly installments and bears interest at 9.75% per annum. The financing company collateralized the loan by potential proceeds obtained from a claim on the insurance (unearned insurance provisions, loss payments that reduce the unearned premiums and any related interests arising from a state guarantee fund). At December 31, 1999, there was no outstanding balance under this credit facility. In January 1999, the Company entered into a financing agreement for $675,000 in order to acquire a software license. The non-interest bearing note (imputed interest rate of 7.80%) is due in sixty equal monthly installments. Borrowings under the financing agreement are collateralized by the software that the Company purchased with the note proceeds. At December 31, 1999, there was approximately $471,000 principal balance remaining on the note. In connection with the acquisition of Creative Business Solutions, Inc. and HealthWeb Systems, Ltd. in February 1999 (Note 10), the Company issued notes of $270,000. The notes bear interest at 8.00% per annum and the interest is payable annually in arrears. Fifty percent of the principal balance is payable on the first anniversary and fifty percent is payable on the second anniversary of the issue date. At December 31, 1999, there was $270,000 principal balance remaining on the notes. In March 1999, the Company entered into a revolving line of credit agreement with a financial institution. In October 1999, we entered into a subsequent agreement which increased the amount available under the line of credit. The line of credit has a total capacity of $3.0 million and expires in November 2000. Borrowings under the line of credit bear interest at prime plus 0.50% (9.0% at December 31, 1999) and are collateralized by substantially all of the assets of the Company. Interest is payable monthly as it accrues. The line of credit agreement contains certain covenants that the Company must adhere to during the term of the agreement including restrictions on the payment of dividends. As of December 31, 1999, there were no outstanding F-11 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) borrowings on the line of credit. The Company has outstanding four standby letters of credit in the aggregate amount of $319,000 which serve as security deposits for four of the Company's capital leases. In May 1999, the Company entered into a financing agreement for approximately $1,131,000. The amount is due in twelve equal monthly installments and bears interest at 10% per annum. Borrowings under the financing agreement are collateralized by the license that the Company purchased from the lender. At December 31, 1999, there was approximately $386,000 principal balance remaining on the note. In December 1999, the Company entered into a lease line of credit with a financial institution. The line of credit has a total capacity of $2.0 million and expires in December 2000. Borrowings under the line of credit at December 31, 1999 were approximately $973,000, and are collateralized by substantially all of the assets of the Company. Future principal payments of notes payable at December 31, 1999 are as follows:
FOR THE PERIODS ENDING DECEMBER 31, ----------------------------------- 2000................................................... $ 623 2001................................................... 245 2002................................................... 119 2003................................................... 129 2004................................................... 11 ------ 1,127 Less: Current portion....................................... (623) ------ $ 504 ======
5. RELATED PARTY TRANSACTIONS In September 1997, the Company entered into a $520,000 financing agreement, bearing interest at 9% and payable quarterly beginning January 1, 1998. The principal amount is due October 1, 2002. In connection with the financing agreement, the Company issued to the financing company warrants to purchase 162,595 shares of common stock with an exercise price of $0.80 per share (Note 7). A member of the Company's Board of Directors owns 50% of the financing company. In August 1999, the warrant to purchase 162,595 shares of common stock was exercised, reducing the principal amount by $130,000. In October 1999, the Company paid off the remaining principal balance of $390,000. The Company has a note receivable for $100,000 from an officer of the Company. The note accrues interest at 6.5% per annum. The principal and accrued interest will be forgiven annually over a four year period beginning April 30, 1999 provided the officer is an employee of the Company. In the event of termination of the officer's employment with the Company the note and accrued interest become due and payable immediately. At December 31, 1999, the note receivable from related party was $75,000. In June 1998 and October 1998, the Company issued full recourse promissory notes to certain officers for $200,000 and $500,000, respectively. The promissory notes are collateralized by 200,000 and 362,319 shares of common stock, bear annual interest at 8% and are payable in 1999, or earlier upon employee termination. In May and June 1999, the Company repurchased the common stock in exchange for the notes. In June 1999, the Company entered into an agreement with Garte & Associates, Inc. pursuant to which the Company would pay Garte & Associates, Inc. an investment banking fee for certain acquisitions. In 1999, the Company paid a total of $256,000 to Garte & Associates, Inc. in connection with the Company's acquisitions of Novalis Corporation and Finserv Health Care Systems, Inc. in late 1999. Harvey Garte, the Company's Vice President of Corporate Development and Investor Relations, is the sole stockholder of Garte & Associates, Inc. F-12 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) In November 1999, in connection with the acquisition of Novalis, the Company received notes receivable in the aggregate amount of $475,000 from eight former stockholders of Novalis. The notes represent the former stockholders' agreement to repay all legal, financial and accounting fees and expenses incurred in connection with the acquisition. The note accrues interest at 8.0% per annum, and is payable one year from the date of acquisition. At December 31, 1999, the note receivable from related parties was $475,000. 6. COMMITMENTS The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through 2006. Capital lease obligations are collateralized by the equipment subject to the leases. The Company is responsible for maintenance costs and property taxes on certain of the operating leases. Rent expense for the years ended December 31, 1999 and 1998 and for the period from May 27, 1997 (date of inception) to December 31, 1997, was $1.2 million , $192,000 and $71,000 respectively. These amounts are net of sublease income of $25,000, $48,000 and $36,000, respectively. Future minimum lease payments (exclusive of interest) under noncancelable operating and capital leases at December 31, 1999 are as follows:
FOR THE PERIODS ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES ----------------------------------- -------------- ---------------- (IN THOUSANDS) 2000...................................................... $1,256 $ 2,729 2001...................................................... 1,150 2,735 2002...................................................... 676 2,452 2003...................................................... 212 1,822 2004...................................................... 164 1,410 Thereafter................................................ -- 1,391 ------ ------- Total minimum lease payments................................ 3,458 $12,539 ======= Less: Current portion....................................... 1,234 ------ $2,224 ======
7. STOCKHOLDERS' EQUITY Common stock In October 1999, the Company completed its initial public offering of 4,480,000 shares of common stock, including 630,000 shares in connection with the exercise of underwriters' over-allotment option, at a price of $9.00 per share, that raised approximately $36.0 million, net of underwriting discounts, commissions and other offering costs. In addition, in connection with the offering, 350,000 shares of common stock of the Company were sold by a selling stockholder at $9.00 per share, for which the Company received no proceeds. Upon the closing of the offering, all of the Company's mandatorily redeemable convertible preferred stock converted into approximately 6,276,000 shares of common stock. At December 31, 1999, the Company had reserved sufficient shares of common stock for issuance upon conversion of preferred stock and exercise of stock options. Common stockholders are entitled to dividends as and when declared by the Board of Directors subject to the prior rights of the preferred stockholders. The holders of each share of common stock are entitled to one vote. The Company issued shares of its common stock to certain employees under restricted stock agreements. These restricted stock agreements grant the Company repurchase rights which lapse upon attainment of full vesting by all stockholders. Full vesting is scheduled to occur on or before April 20, 2000. At December 31, 1999 and 1998, 1,698,441 and 4,405,602 shares of common stock are subject to repurchase by the Company, respectively. F-13 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Mandatorily redeemable convertible preferred stock In April and October 1998, the Company issued an aggregate of 4,545,454 shares of Series A mandatorily redeemable convertible preferred stock ("convertible preferred stock") at $1.43 per share for gross proceeds of $6.5 million. In April 1999, the Company issued 1,730,770 shares of Series B convertible preferred stock at $2.60 per share for gross proceeds of $4.5 million. Upon the closing of the Company's initial public offering, all of the Company's mandatorily redeemable convertible preferred stock converted into approximately 6,276,000 shares of common stock. Stock option plan In May 1998, the Company adopted the 1998 Stock Option Plan (the "Plan") under which the Board of Directors may issue incentive and non-qualified stock options to employees, directors and consultants. The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and exercise price. Options are to be granted at an exercise price not less than fair market value for incentive stock options or 85% of fair market value for non-qualified stock options. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise price of incentive stock options will not be less than 110% of fair market value. The options generally vest and become exercisable annually at a rate of 25% of the option grant over a four year period. The term of the options is no longer than five years for incentive stock options for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options. Activity under the Plan is as follows (in thousands, except per share data):
OUTSTANDING OPTIONS SHARES --------------------------- WEIGHTED AVAILABLE NUMBER OF AGGREGATE AVERAGE FOR GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE --------- --------- -------------- --------- -------------- Options reserved at Plan inception......... 1,600 -- -- -- -- Granted.................................... (1,159) 1,159 $0.25 - $0.28 $ 297 $0.26 Cancelled.................................. 10 (10) $0.25 (2) 0.25 ------ ----- -------------- ------- ----- Balances, December 31, 1998................ 451 1,149 $0.25 - $0.28 295 0.26 Additional options reserved................ 2,400 Granted.................................... (2,620) 2,620 $0.25 - $2.60 16,312 6.23 Exercised.................................. -- 60 0.25 (15) 0.25 Cancelled.................................. 204 (204) $0.25 - $1.00 (117) 0.57 ------ ----- -------------- ------- ----- Balances, December 31, 1999................ 435 3,505 $0.25 - $29.75 $16,475 $4.70 ====== ===== ============== ======= =====
The options outstanding and currently exercisable by exercise price at December 31, 1999 are as follows (in thousands, except per share data):
OPTIONS EXERCISABLE AT OPTIONS OUTSTANDING AT DECEMBER 31, 1999 DECEMBER 31, 1999 - -------------------------------------------------------------------------- ------------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF EXERCISE NUMBER REMAINING CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ----------------- ----------- --------------------- ---------------- ----------- ---------------- $ 0.25 -$2.60 .. 2,597 9.02 $ 0.79 239 $0.28 $ 6.50 - $6.50 .. 311 9.61 $ 6.50 2 7 $14.50 - $14.50.. 155 9.85 $14.50 1 15 $20.25 - $29.75.. 442 9.93 $23.01 -- -- ----- --- 3,505 9.22 $ 4.72 222 $0.40 ===== ===
F-14 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Stock-based compensation The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." Had compensation cost for the Incentive Stock Plan been determined based on the fair value at the grant date for awards during 1998 and the year ended December 31, 1999, consistent with the provisions of SFAS No. 123, the Company's net income would have been as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, ----------------- 1999 1998 ------- ------ Net income (loss), as reported.............................. $(7,927) $ 60 Net income (loss), pro forma................................ $(8,695) $ 54 Net income (loss) per share, as reported: Basic..................................................... ($ 0.85) $ 0.01 Diluted................................................... ($ 0.85) $ 0.00 Net income (loss) per share, pro forma: Basic..................................................... ($ 0.93) $ 0.01 Diluted................................................... ($ 0.93) $ 0.00
Such pro forma disclosures may not be representative of future compensation cost because options vest over several years and additional grants are anticipated to be made each year. At December 31, 1999 and December 31, 1998, options exercisable under the Plan were 241,921 and none, respectively. The weighted average fair values of options granted during 1999 and the year ended December 31, 1998 were $29.86 and $0.05, respectively. The fair value of each option grant is estimated on the date of grant using the minimum value method with the following weighted average assumptions:
DECEMBER 31, DECEMBER 31, 1998 1999 ------------ ------------ Risk-free interest rate..................................... 5.18% 6.34% Expected life............................................... 4 years 4 years Expected dividends.......................................... -- --
Employee Stock Purchase Plan In July 1999, the board of directors adopted the Employee Stock Purchase Plan ("Stock Purchase Plan"). A total of 600,000 shares of common stock have been reserved for issuance under the Stock Purchase Plan. Employees are eligible to participate if they are employed for at least 20 hours per week and for more than five months in any calendar year. Employees who own more than 5% of the Company's outstanding stock may not participate. The Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed the lesser of 15% of an employee's compensation or $25,000. The Stock Purchase Plan will be implemented by 12 month offerings with purchases occurring at six month intervals commencing January 1, 2000. The purchase price of the common stock under the Stock Purchase Plan will be equal to 85% of the fair market value per share of common stock on either the start date of the offering period or on the purchase date, whichever is less. In the event of a proposed dissolution or liquidation of the Company, the offering periods terminate immediately prior to the consummation of the proposed action, unless otherwise provided by the Company's board of directors. The Employee Stock Purchase Plan will terminate in 2009, unless terminated sooner by the board of directors. F-15 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Deferred stock compensation As of December 31, 1999, the Company recorded deferred compensation related to options granted to employees in the total amount of $6.9 million, representing the difference between the deemed fair value of the common stock, as determined for accounting purposes, and the exercise price of the options at the date of grant. Of this amount, $1.1 million had been amortized in 1999, and approximately $22,000 had been amortized in 1998. The Company amortizes deferred compensation over the vesting period of the underlying option. Warrants In connection with the acquisition of Croghan & Associates (Note 10), the Company issued a warrant to purchase 162,595 shares of the Company's common stock an exercise price of $0.80 per share to replace an existing warrant to purchase Croghan & Associates stock. The value of the warrant determined using the Black Scholes model was not material. In August 1999, the warrant to purchase 162,595 shares of common stock was exercised. 8. INCOME TAXES The provision for income taxes consists of the following (in thousands):
FOR THE PERIOD YEAR ENDED FROM MAY 27, 1997 DECEMBER 31, (DATE OF INCEPTION) ------------- TO DECEMBER 31, 1999 1998 1997 ----- ---- ------------------- Current Federal................................................. $ (48) $143 $ 156 State................................................... 22 22 23 ----- ---- ----- Net income (loss) per share............................... (26) 165 179 ----- ---- ----- Deferred Federal................................................. (164) (71) (91) State................................................... (23) (12) (14) ----- ---- ----- (187) (83) (105) ----- ---- ----- Total income tax provision (benefit)...................... $(213) $ 82 $ 74 ===== ==== =====
The Company's effective tax rate differs from the statutory rate as shown in the following schedule (in thousands):
FOR THE PERIOD YEAR ENDED FROM MAY 27, 1997 DECEMBER 31, (DATE OF INCEPTION) --------------- TO DECEMBER 31, 1999 1998 1997 ------- ---- ------------------- Tax provision at federal statutory rate.................. $(2,768) $48 $60 State income taxes, net of federal benefit............... (385) 7 10 Increase in valuation allowance.......................... 1,355 -- -- Goodwill amortization.................................... 699 -- -- Deferred stock amortization.............................. 412 -- -- Nondeductible items and other............................ 474 23 3 Other.................................................... -- 4 1 ------- --- --- Tax provision (benefit).................................. $ (213) $82 $74 ======= === ===
F-16 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) Temporary differences which gave rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):
FOR THE PERIOD YEAR ENDED FROM MAY 27, 1997 DECEMBER 31, (DATE OF INCEPTION) --------------- TO DECEMBER 31, 1999 1998 1997 ------ ----- ------------------- Deferred tax assets: Net operating loss carryforwards...................... $1,433 $ -- $ -- Reserves and accruals................................. 425 191 96 Fixed assets.......................................... -- -- 9 Research credits...................................... 36 -- -- ------ ----- ----- Deferred tax assets..................................... 1,894 191 105 ------ ----- ----- Deferred tax liabilities: Deferred revenue...................................... -- (374) (374) Fixed assets.......................................... (446) (3) -- Other................................................. (93) -- -- ------ ----- ----- Deferred tax liabilities................................ $ (539) $(377) $(374) Valuation allowance..................................... (1,355) -- -- Net deferred taxes...................................... $ -- $(186) $(269) ====== ===== =====
Tax loss carryforwards at December 31, 1999 are approximately $3.5 million for federal purposes. The federal loss carryforward will expire in the fiscal year ended 2019. Availability of the net operating loss carryforward may potentially be reduced in the event of certain substantial changes in equity ownership. 9. EMPLOYEE BENEFIT PLAN In January 1998, the Company adopted a plan (the "Plan") which qualifies under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees may make voluntary contributions to the Plan of up to 20% of their annual compensation, not to exceed the statutory amount, and the Company may make matching contributions. The Company has made no contributions since the Plan's inception. 10. ACQUISITIONS On October 1, 1997, the Company acquired all of the outstanding common stock of Croghan & Associates, Inc. ("Croghan & Associates"). The total purchase price was approximately $436,000, which consisted of 5,800,895 shares of the Company's common stock. The acquisition has been accounted for as a purchase and results of its operations have been included in the consolidated financial statements from the date of acquisition. In February 1999, the Company acquired all of the outstanding shares of Creative Business Solutions, Inc. ("Creative Business Solutions"), an Internet solutions development company specializing in the integration of healthcare information technology and contract programming solutions, and its majority owned subsidiary, HealthWeb Systems, Ltd. ("HealthWeb"), an Internet software and portal development company specializing in customized healthcare applications. The Company also acquired the remaining minority interest in HealthWeb. The acquisitions were accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair market values on the acquisition date. The purchase price of approximately $3.3 million consisted of approximately $1.4 million in cash, 655,000 shares of common stock, notes payable of $270,000, assumed liabilities of $527,000 and acquisition F-17 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) costs of approximately $100,000. Included in the 655,000 shares of common stock issued in the acquisition were 131,000 shares held in escrow to secure indemnification obligations of the Creative Business Solutions and HealthWeb shareholders. Such shares, which will be held in escrow for a two-year period, have been included in the purchase price allocation. Based upon an appraisal by an independent valuation firm, the value of the 655,000 shares of common stock issued in the acquisition was determined to be $1.1 million. The excess of the purchase price over the fair market value of the net tangible assets acquired aggregated approximately $2.5 million, of which $484,000 was allocated to acquired in-process technology and $2.1 million was allocated to goodwill and other intangible assets. An independent appraisal was performed to determine the fair value of the identifiable assets, including the portion of the purchase price attributed to the acquired in-process technology. The income approach was used to value acquired in-process technology, which includes an analysis of the completion costs, cash flows, other required assets and risks associated with achieving such cash flows. At the date of acquisition, the Company determined the technological feasibility of HealthWeb's product was not established, and accordingly, wrote-off the corresponding amount to acquired in-process technology. HealthWeb is expected to introduce the final product by the end of 1999. Approximately $650,000 in research and development had been spent up to the date of the acquisition in an effort to develop the technology to produce a commercially viable product. The future research and development expense associated with the acquired in-process product was estimated to be approximately $975,000 between July 1999 and the first quarter of 2000. Currently, the Company knows of no developments that would lead it to change its original assessment of the expected completion and commercial viability of this project. At the date of acquisition, the only identifiable intangible assets acquired were the technology under development, the acquired workforce and customer list. In April 1999, the Company acquired certain assets and liabilities from Management and Technology Solutions, Inc. ("MTS") in exchange for 60,000 shares of common stock. The assets included property and equipment, intellectual property, trademarks and licenses, and computer software and software licenses. As part of this transaction, the Company assumed liabilities consisting of lease obligations, a note payable and certain other accrued liabilities. In November 1999, the Company acquired all the outstanding shares of the Novalis Corporation ("Novalis"). The purchase price of approximately $18.7 million consisted of cash in the amount of approximately $5.0 million, 549,786 shares of common stock with a value of $16.37 per share, assumed liabilities of $1.9 million and acquisition costs of approximately $2.8 million. Of the total purchase price, $923,000 was allocated to in-process technology and the remainder of the purchase price was allocated to assets acquired and liabilities assumed. Of the 549,786 shares of common stock which have been issued in connection with this acquisition, 366,524 shares of the common stock have been held in escrow until the resolution of certain pre-acquisition contingencies. The acquisition of Novalis was accounted for using the purchase method of accounting. The excess of the purchase price over the fair market value of the assets purchased and liabilities assumed was $13.5 million, of which $923,000 was allocated to acquired in-process technology, based upon an independent appraisal, and was written-off in the year ended December 31, 1999, and $12.6 million was allocated to goodwill and intangible assets consisting of assembled workforce, core technology and customer lists. As of the acquisition date, Novalis was developing several enhancements to its proprietary software products. Approximately $535,000 in research and development had been spent up to the date of the acquisition in an effort to develop the next releases of the in-process and core technology. The future research and development expense associated with the in-process and core technology was estimated to be approximately $490,000. The in-process and core technology was scheduled to be released by June 30, 2000. In valuing Novalis' developed, in-process and core technologies, the Company utilized the relief from royalty method. The relief from royalty method assumes that the value of the intangible asset is estimated by quantifying the royalties saved due to our ownership of the software. A revenue stream for the asset was estimated based on Novalis' total revenue projections over its estimated life. An appropriate royalty rate is then applied to the forecasted revenue to estimate the pre-tax income associated with the asset. This income stream was tax effected and discounted to its present value to estimate the value of the developed, in-process and core F-18 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) technologies. For purposes of this analysis, the Company used 15%, 20% and 25% discount rates for the developed, in-process and core technologies, respectively. These discount rates are consistent with the risks inherent in achieving the projected cash flows. In December 1999, the Company acquired all of the outstanding shares of Finserv HealthCare Systems, Inc. ("Finserv"). The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair market values on the acquisition date. The purchase price of approximately $4.8 million consisted of cash in the amount of approximately $1.8 million, 48,998 shares of common stock with a value of $30.61 per share, assumed liabilities of $1.1 million, and acquisition costs of approximately $0.4 million. The agreement also provides that an additional amount of shares, up to $750,000 in shares (the "earnout consideration"), may be issued to the Finserv Securityholders if certain milestones are achieved for the fiscal years ending December 31, 2000 and 2001. Of the 48,998 shares of common stock which have been issued in connection with this acquisition, 20,000 shares of common stock have been held in escrow until the resolution of certain pre-acquisition contingencies. The purchase price has been allocated to the assets acquired and liabilities assumed and the remainder has been allocated to unidentifiable goodwill. The purchase price allocations were based on the estimated fair value of the assets, less liabilities, on the date of purchases as follows (in thousands):
CREATIVE CROGHAN & BUSINESS ASSOCIATES SOLUTIONS NOVALIS FINSERV ---------- --------- ------- ------- Total current assets..................................... $ 1,236 $ 596 $ 2,251 $ 827 Property, plant, equipment and other noncurrent assets... 511 175 2,795 276 Goodwill................................................. -- 1,338 3,277 3,656 Other intangible assets.................................. -- 726 9,427 -- Acquired in-process technology........................... -- 484 923 -- Total liabilities........................................ (1,311) -- -- -- ------- ------ ------- ------ Total purchase price................................ $ 436 $3,319 $18,673 $4,759 ======= ====== ======= ======
The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of Croghan & Associates had occurred on May 27, 1997, the date of inception for the Company (in thousands):
FOR THE PERIOD FROM MAY 27, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 ------------------- Net revenue................................................. $4,244 Net loss before extraordinary item.......................... $ (880) Net income.................................................. $ 120
The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of Creative Business Solutions, Novalis Corporation and Finserv occurred on January 1, 1998, giving effect to an acquisition adjustment for amortization of goodwill and other intangibles and the write-off of acquired in-process technology (in thousands):
YEAR ENDED DECEMBER 31, 1998 ----------------- Net revenue..................................... $ 39,312 Net loss........................................ $(10,510)
F-19 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
YEAR ENDED DECEMBER 31, 1999 ----------------- Net Revenue..................................... $ 58,706 Net loss........................................ $(15,177)
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the entire period presented. In addition, they are not intended to be a projection of future results. 11. SUPPLEMENTAL CASH FLOW DISCLOSURES
FOR THE YEAR FOR THE PERIOD ENDED FROM MAY 27, 1997 DECEMBER 31, (DATE OF INCEPTION) ------------- TO DECEMBER 31, 1999 1998 1997 ----- ---- ------------------- SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION Cash paid for interest.................................... $ 120 $ 59 $ 2 Cash paid for income taxes................................ 42 705 43 NONCASH INVESTING AND FINANCING ACTIVITIES Common stock issued for notes receivable.................. -- -- 13 Common stock issued for Croghan & Associates.............. -- -- 436 Assets acquired through capital lease..................... 3,550 167 -- Deferred stock compensation............................... 6,383 482 -- Common stock issued for notes receivable.................. -- 53 -- Issuance of notes payable to acquire software and software license................................................. 1,690 -- -- Common stock issued for Creative Business Solutions....... 1,146 -- -- Notes payable issued for Creative Business Solutions...... 270 -- -- Repurchase of shares in exchange for stockholder notes receivable.............................................. 700 -- -- Common stock issued to purchase assets of Management and Technology Solutions, Inc. ............................. 140 -- -- Exercise of common stock warrants......................... 130 Common stock issued to purchase assets of Novalis Corporation............................................. 8,999 -- -- Common stock issued to purchase assets of Finserv Healthcare Systems, Inc. ............................... 1,499 -- --
12. SEGMENT INFORMATION The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 requires enterprises to report information about operating segments in annual financial statements and selected information about reportable segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in two business segments: recurring or multi-year contractually based revenue, and revenue generated via non-recurring agreements. The recurring business is subscription based and provides customers with a portion, or all, of their information technology and related business service needs. The consulting business provides customers with solutions to their connectivity and integration needs as well as technical support on an as needed basis. F-20 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The Company evaluates performance and allocates resources based on gross margin. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company's reportable segments are business units that are organized primarily by the nature of services provided. The reportable segments are managed separately because of the difference in marketing strategies, customer base, and client approach. Financial information about segments is reported in the consolidated statements of operations. The Company's assets are all located in the United States, and all sales were to customers located in the United States. 13. SUBSEQUENT EVENTS RECENT DEVELOPMENTS On March 28, 2000, the Company entered into an Agreement and Plan of Reorganization with IMS Health Incorporated, a Delaware corporation, under which IMS will merge with and into the Company. At the closing, we will issue .4655 shares of the Company's Common Stock for each share of outstanding common stock of IMS. On the date of signing, the transaction was valued at approximately $8.6 billion. Consummation of the merger is subject to the approval of each company's stockholders as well as various third parties and federal agencies. In January 2000, the Company acquired all of the outstanding shares of Healthcare Media Enterprises, Inc. Healthcare Media Enterprises' primary business focus is on software development, especially relating to the Internet, web design, and business to business portals. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair market values on the acquisition date. The purchase price of approximately $5.8 million consisted of cash in the amount of approximately $1.6 million, 87,359 shares of common stock with a value of $40.06 per share, assumed liabilities of $625,000 and acquisition costs of approximately $100,000. F-21 74 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT ADDITIONS BEGINNING OF CHARGED TO COSTS BALANCE AT PERIOD AND EXPENSES DEDUCTIONS ENDING PERIOD ------------ ---------------- ---------- ------------- Period Ended December 31, 1997 Allowance for doubtful accounts............ $ -- $204 $ 50 $154 Year Ended December 31, 1998 Allowance for doubtful accounts............ $154 $203 $153 $204 Year Ended December 31, 1999 Allowance for doubtful accounts............ $204 $505 $112 $597
F-22 75 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 Exchange Agreement, dated October 1, 1997, by and among M.C. Health Holdings, Inc. and the stockholders of Croghan & Associates, Inc. and stockholders of Margolis Health Enterprises, Inc. (Incorporated by reference to Exhibit 2.1 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 2.2+ Stock Purchase Agreement, dated February 5, 1999 by and among TriZetto, Creative Business Solutions, Inc. and the stockholders of Creative Business Solutions, Inc. (Incorporated by reference to Exhibit 2.2 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 2.3+ Partnership Interest Purchase Agreement, dated February 5, 1999, by and between TriZetto, TriZetto Acquisition Group, LLC, HealthWeb Systems, Ltd, HealthWeb General Partner, Inc. and the holders of partnership interests (Incorporated by reference to Exhibit 2.3 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 2.4 Asset Purchase Agreement, dated April 1,1999, between TriZetto and Management Technology Solutions, Inc. (Incorporated by reference to Exhibit 2.4 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 2.5+ Information Technology Services Agreement, dated May 1, 1999, between TriZetto and MedPartners, Inc. (Incorporated by reference to Exhibit 2.5 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 2.6 Escrow Agreement, dated February 15, 1999, by and among TriZetto and the stockholders of Creative Business Solutions, Inc. (Incorporated by reference to Exhibit 2.6 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 6, 1999, File No. 333-84533) 2.7 Escrow Agreement, dated February 5, 1999, by and among TriZetto and the holders of partnership interests in HealthWeb (Incorporated by reference to Exhibit 2.7 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 6, 1999, File No. 333-84533) 2.8 Stock Purchase Agreement, dated November 29, 1999, by and among TriZetto, Novalis Corporation, the Novalis Noteholders described therein, and the Novalis Stockholders described therein (Incorporated by reference to Exhibit 2.1 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501)
76 2.9 Offset Escrow Agreement, dated as of November 29, 1999, by and among TriZetto, the Novalis Securityholders described therein, ABS Capital Partners, Inc., as Representative, and Bankers Trust Company of California, N.A., as Escrow Agent (Incorporated by reference to Exhibit 2.2 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.10 Registration Rights Agreement, dated as of November 29, 1999, by and among TriZetto and certain TriZetto stockholders (Incorporated by reference to Exhibit 2.3 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.11 Form of Promissory Note as executed by certain Novalis Securityholders in favor of Novalis Corporation (Incorporated by reference to Exhibit 2.4 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.12 Warrant and Warrant Assignment, dated as of November 29, 1999, issued by QCA Health Plan, Inc. in favor of Silavon, Inc. and assigned to TriZetto (Incorporated by reference to Exhibit 2.5 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.13 Non-Competition Agreement, dated as of November 29, 1999, by and between TriZetto and Chester E. Burrell (Incorporated by reference to Exhibit 2.6 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.14 Warrant Escrow Agreement, dated as of November 29, 1999, by and among TriZetto, the Novalis Securityholders described therein, Silavon, Inc., ABS Capital Partners, Inc., as Representative, and Stradling Yocca Carlson & Rauth, as Escrow Agent (Incorporated by reference to Exhibit 2.7 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.15 Form of Stock Pledge Agreement entered into by and between Novalis Corporation and certain Novalis Securityholders (Incorporated by reference to Exhibit 2.8 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on December 14, 1999, File No. 000-27501) 2.16 Agreement and Plan of Merger, dated as of December 22, 1999, by and among TriZetto, Finserv Acquisition Corp., Finserv Health Care Systems, Inc., and the Finserv Securityholders described therein (Incorporated by reference to Exhibit 2.1 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501) 2.17 Escrow Agreement, dated as of December 22, 1999, by and among TriZetto, the Finserv Securityholders described therein, Stuart Schloss, as Representative, and Bankers Trust Company of California, N.A., as Escrow Agent (Incorporated by reference to Exhibit 2.2 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501) 2.18 Form of Non-Competition Agreement, dated as of December 22, 1999, as entered into by and between TriZetto and certain employees (Incorporated by reference to Exhibit 2.3 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501) 2.19 Registration Rights Agreement, dated as of December 22, 1999, by and among TriZetto and certain TriZetto stockholders (Incorporated by reference to Exhibit 2.4 of TriZetto's Form 8-K as filed with the Securities and Exchange Commission on January 6, 2000, File No. 000-27501)
77 3.1 Amended and Restated Certificate of Incorporation of TriZetto, as filed with the Delaware Secretary of State effective as of April 8, 1999 (Incorporated by reference to Exhibit 3.1 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 3.2 Form of Amended and Restated Certificate of Incorporation of TriZetto, as filed with the Delaware Secretary of State effective as of October 14, 1999 (Incorporated by reference to Exhibit 3.2 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on September 14, 1999, File No. 333-84533) 3.3 Amended and Restated Bylaws of TriZetto, effective as of April 29, 1998 (Incorporated by reference to Exhibit 3.3 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 3.4 Amended and Restated Bylaws of TriZetto effective as of October 7, 1999 (Incorporated by reference to Exhibit 3.4 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 4.1 Specimen common stock certificate (Incorporated by reference to Exhibit 4.1 of TriZetto's Registration Statement on Form S-1/A as filed with the Securities and Exchange Commission on September 14, 1999, File No. 333-84533) 10.1* 1998 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.2* Form of 1998 Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.2 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.3* Form of 1998 Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.3 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.4* 1999 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.4 of TriZetto's Registration Statement on Form S-1/A as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.5* Employment Agreement, dated April 30, 1998, by and between TriZetto and Jeffrey H. Margolis (Incorporated by reference to Exhibit 10.5 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.6 Promissory Note, dated April 30, 1998, by and between TriZetto and Jeffrey H. Margolis (Incorporated by reference to Exhibit 10.6 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.7 Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.7 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.8 First Amended and Restated Investor Rights Agreement, dated April 9, 1999 by and among Raymond Croghan, Jeffrey Margolis, TriZetto, and Series A and Series B Preferred Stockholders (Incorporated by reference to Exhibit 10.8 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533)
78 10.9+ Professional Services Agreement, dated January 1, 1999, by and between TriZetto and CCN Managed Care, Inc. (Incorporated by reference to Exhibit 10.9 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 10.10 Office Lease Agreement, dated April 26, 1999, between St. Paul Properties, Inc. and TriZetto (including addendum) (Incorporated by reference to Exhibit 10.10 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.11 Sublease Agreement, dated December 18, 1998, between TPI Petroleum, Inc. and TriZetto (including underlying Office Lease Agreement by and between St. Paul Properties, Inc. and Total, Inc.) (Incorporated by reference to Exhibit 10.11 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.12 Sublease Agreement, dated May 1, 1999, between MedPartners, Inc. and TriZetto (including underlying Lease by and between Riverchase Tower, Ltd. And MedPartners, Inc.) (Incorporated by reference to Exhibit 10.12 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.13+ Technical Support Agreement, dated May 15, 1995, between DHI Computing Services, Inc. and Croghan & Associates, Inc. (Incorporated by reference to Exhibit 10.13 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.14+ Standard Multi-Directory and Support Agreement, dated May 25, 1999, between TriZetto and Epic Systems Corporation (Incorporated by reference to Exhibit 10.14 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 4, 1999, File No. 333-84533) 10.15+ Master Software License Agreement, dated May 1, 1999, between Medic Computer Systems, Inc. and TriZetto (Incorporated by reference to Exhibit 10.15 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on October 6, 1999, File No. 333-84533) 10.16+ Addendum to the Master License Agreement, dated April 15, 1999, between Medical Manager Midwest, Inc. and Management and Technology Solutions, Inc. (including underlying Medical Manager License Agreement between Medical Manager Midwest, Inc. and Management and Technology Solutions, Inc.) (Incorporated by reference to Exhibit 10.16 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.17+ Technical Infrastructure Maintenance Agreement, dated March 1, 1998, between Medical Manager Midwest, Inc. and Management and Technology Solutions, Inc. (Incorporated by reference to Exhibit 10.17 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.18 North American Partner Agreement, dated May 26, 1999, between Great Plains Software and TriZetto (Incorporated by reference to Exhibit 10.18 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533) 10.19 Form of Restricted Stock Purchase Agreement between TriZetto and certain employees (Incorporated by reference to Exhibit 10.19 of TriZetto's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on August 5, 1999, File No. 333-84533)
79 10.20 Bank One Credit Facility (including Promissory Note, Loan Agreement and Commercial Security Agreement) dated March 4, 1999 (Incorporated by reference to Exhibit 10.20 of TriZetto's Registration Statement on Form S-1/A, as filed with the Securities and Exchange Commission on August 18, 1999, File No. 333-84533) 10.21 Bank One Credit Facility (including Promissory Note, Loan Agreement and Commercial Security Agreement), dated October 27, 1999 10.22 First Modification and Ratification of Lease, dated November 1, 1999, by and between TriZetto and St. Paul Properties, Inc. 10.23 Second Modification and Ratification of Lease, dated December 1999, by and between TriZetto and St. Paul Properties, Inc. 10.24 Bank One Master Lease Agreement and related Security Agreement, dated December 1999 21.1 Current Subsidiaries of TriZetto. 23.1 Consent of PricewaterhouseCoopers LLP with respect to the financial statements of TriZetto. 27.1 Financial Data Schedule.
* This exhibit is identified as a management contract or compensatory plan or arrangement of TriZetto pursuant to Item 14(a) of Form 10-K. + Portions of this exhibit are omitted and were filed separately with the SEC pursuant to TriZetto's confidential treatment requests under Rule 406 of the Securities Act of 1933. EX-10.21 2 BANK ONE CREDIT FACILITY 1 EXHIBIT 10.21 [BANK-ONE LOGO] PROMISSORY NOTE - ------------------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $3,000,000.00 10-27-1999 11-04-2000 106525 328 2756603893 00480 - ------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------------------------------
BORROWER: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION 567 SAN NICOLAS DRIVE - SUITE 360 NEWPORT BEACH, CA 92660 LENDER: Bank One, Colorado, NA Corporate Lending - Boulder 1125 17th Street Denver, CO 80217 PRINCIPAL AMOUNT: $3,000,000.00 DATE OF NOTE: OCTOBER 27, 1999 PROMISE TO PAY. FOR VALUE RECEIVED, THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION ("BORROWER") PROMISES TO PAY TO BANK ONE, COLORADO, NA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF THREE MILLION & 00/100 DOLLARS ($3,000,000.00) ("TOTAL PRINCIPAL AMOUNT") OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE FROM THE DATE ADVANCED UNTIL PAID IN FULL. PAYMENT. THIS NOTE SHALL BE PAYABLE AS FOLLOWS: INTEREST SHALL BE DUE AND PAYABLE MONTHLY AS IT ACCRUES, COMMENCING ON DECEMBER 4, 1999 AND CONTINUING ON THE SAME DAY OF EACH MONTH THEREAFTER DURING THE TERM OF THIS NOTE, AND THE OUTSTANDING PRINCIPAL BALANCE OF THIS NOTE, TOGETHER WITH ALL ACCRUED BUT UNPAID INTEREST, SHALL BE DUE AND PAYABLE ON NOVEMBER 4, 2000. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at the address designated by Lender from time to time in writing. If any payment of principal of or interest on this Note shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. As used herein, the term "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed. Unless otherwise agreed to, in writing, or otherwise required by applicable law, payments will be applied first to accrued, unpaid interest, then to principal, and any remaining amount to any unpaid collection costs, late charges and other charges, provided, however, upon delinquency or other default, Lender reserves the right to apply payments among principal, interest, late charges, collection costs and other charges at its discretion The books and records of Lender shall be prima facie evidence of all outstanding principal of and accrued but unpaid interest on this Note. This Note may be executed in connection with a loan agreement. Any such loan agreement may contain additional rights, obligations and terms. VARIABLE INTEREST RATE. THE INTEREST RATE ON THIS NOTE IS SUBJECT TO FLUCTUATION BASED UPON THE PRIME RATE OF INTEREST IN EFFECT FROM TIME TO TIME (THE "INDEX") (WHICH RATE MAY NOT BE THE LOWEST, BEST OR MOST FAVORABLE RATE OF INTEREST WHICH LENDER MAY CHARGE ON LOANS TO ITS CUSTOMERS). "PRIME RATE" SHALL MEAN THE RATE ANNOUNCED FROM TIME TO TIME BY LENDER AS ITS PRIME RATE. EACH CHANGE IN THE RATE TO BE CHARGED ON THIS NOTE WILL BECOME EFFECTIVE WITHOUT NOTICE ON THE SAME DAY AS THE INDEX CHANGES. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL ACCRUE INTEREST AT A RATE PER ANNUM WHICH WILL FROM TIME TO TIME BE EQUAL TO THE SUM OF THE INDEX, PLUS 0.500%. NOTICE: UNDER NO CIRCUMSTANCES WILL THE INTEREST RATE ON THIS NOTE BE MORE THAN THE MAXIMUM RATE ALLOWED BY APPLICABLE LAW. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without fee all or a portion of the principal amount owed hereunder earlier than it is due. All prepayments shall be applied to the indebtedness owing hereunder in such order and manner as Lender may from time to time determine in its sole discretion. LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged 5.000% OF THE REGULARLY SCHEDULED PAYMENT OR $25.00, WHICHEVER IS GREATER. DEFAULT. Borrower will be in default if any of the following happens (a) Borrower fails to make any payment of principal or interest when due under this Note or any other indebtedness owing now or hereafter by Borrower to Lender; (b) failure of Borrower or any other party to comply with or perform any term, obligation, covenant or condition contained in this Note or in any other promissory note, credit agreement, loan agreement, guaranty, security agreement, mortgage, deed of trust or any other instrument, agreement or document, whether now or hereafter existing, executed in connection with this Note (the Note and all such other instruments, agreements, and documents shall be collectively known herein as the "RELATED DOCUMENTS"); (c) Any representation or statement made or furnished to Lender herein, in any of the Related Documents or in connection with any of the foregoing is false or misleading in any material respect, (d) Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantor, surety or otherwise, becomes insolvent or bankrupt, has a receiver or trustee appointed for any part of its property, makes an assignment for the benefit of its creditors, or any proceeding is commenced either by any such party or against it under any bankruptcy or insolvency laws, (e) the occurrence of any event of default specified in any of the other Related Documents or in any other agreement now or hereafter arising between Borrower and Lender; (f) the occurrence of any event which permits the acceleration of the maturity of any indebtedness owing now or hereafter by Borrower to any third party; or (g) the liquidation, termination, dissolution, death or legal incapacity of Borrower or any other party liable for the payment of this Note, whether as maker, endorser, guarantor, surety, or otherwise. LENDER'S RIGHTS. Upon default, Lender may at it option, without further notice or demand (i) declare the entire unpaid principal balance on this Note, all accrued unpaid interest and all other costs and expenses for which Borrower is responsible for under this Note and any other Related Document immediately due, (ii) refuse to advance any additional amounts under this Note, (n) foreclose all liens securing payment hereof, (iv) pursue any other rights, remedies and recourses available to the Lender, including without limitation, any such rights, remedies or recourses under the Related Documents, at law or in equity, or (v) pursue any combination of the foregoing. Upon default, including failure to pay upon final maturity, Lender, at it option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 3.500 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire an attorney to help collect this Note if Borrower does not pay and Borrower will pay Lender's reasonable attorneys' fees and all other costs of collection, unless prohibited by applicable law. This Note has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration, this Note shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. PURPOSE. Borrower agrees that no advances under this Note shall be used for personal, family, or household purposes and that all advances hereunder shall be used solely for business, commercial, agricultural or other similar purposes. JURY WAIVER. THE BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE, ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP BETWEEN LENDER AND BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Borrower may request advances and make payments hereunder from time to time, provided that it is understood and agreed that the aggregate principal amount outstanding from time to time hereunder shall not at any time exceed the Total Principal Amount. The unpaid principal balance of this Note shall increase and decrease with each new advance or payment hereunder, as the case may be. Subject to the terms hereof, Borrower may borrow, repay and reborrow hereunder. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Note, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be resolved by binding arbitration pursuant to the Commercial Rules of the American Arbitration Association ("AAA"). Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any collateral shall constitute a 2 10-27-1999 PROMISSORY NOTE LOAN NO. (CONTINUED) PAGE 2 - -------------------------------------------------------------------------------- waiver of this arbitration agreement or be prohibited by this arbitration agreement. This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. Such remedies include, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgage, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, including exercising the right of set-off, or taking or disposing of such property with or without judicial process pursuant to the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of an act, or exercise of any right or remedy, concerning any collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral, shall also be arbitrated; provided, however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for these purposes. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. RENEWAL AND EXTENSION. This Note is given in replacement, renewal and/or extension of, but not extinguishing the indebtedness evidenced by, that promissory note dated March 4, 1999 executed by Borrower in the original principal amount of $1,500,000.00, and is not a novation thereof. All interest evidenced by the note being replaced, renewed, and/or extended by this instrument shall continue to be due and payable until paid. ADDITIONAL PROVISION REGARDING LATE CHARGES. In the "Late Charge" provision set forth above, the following language is hereby added after the word "greater": "up to the maximum amount of One Thousand Five Hundred Dollars ($1500.00) per late charge". GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this Note, or release any party or guarantor or collateral; or unjustifiably impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this Note without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION By: /s/ JEFFREY H. MARGOLIS -------------------------------------- JEFFREY H. MARGOLIS, PRESIDENT AND CEO 3 [BANK-ONE LOGO] COMMERCIAL SECURITY AGREEMENT - ------------------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $3,000,000.00 10-27-1999 11-04-2000 106525 328 2756603893 00480 - ------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item - ------------------------------------------------------------------------------------------------------------------
BORROWER: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION 567 SAN NICOLAS DRIVE - SUITE 360 NEWPORT BEACH, CA 92660 LENDER: Bank One, Colorado, NA Corporate Lending - Boulder 1125 17th Street Denver, CO 80217 THIS COMMERCIAL SECURITY AGREEMENT is entered into by THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION (referred to below as "Grantor") for the benefit of Bank One, Colorado, NA (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code as adopted in the State of Colorado ("Code") All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. COLLATERAL. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL INTANGIBLES In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All proceeds (including, without limitation, insurance proceeds) from the sale, lease, destruction, loss, or other disposition of any of the property described in this Collateral section. (d) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. EVENT OF DEFAULT. The words "Event of Default" mean and include any of the Events of Default set forth below in the section titled "Events of Default." GRANTOR. The word "Grantor" means THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION, its successors and assigns (which is a debtor under the Code). GUARANTOR. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus any accrued interest thereon, owing by Grantor, or any one or more of them, to Lender of any kind or character, now existing or hereafter arising, as well as all present and future claims by Lender against Grantor, or any one or more of them, and all renewals, extensions, modifications, substitutions and rearrangements of any of the foregoing, whether such Indebtedness arises by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, overdraft, indemnity agreement or otherwise; whether such Indebtedness is voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others, whether Grantor may be liable primarily or secondarily or as debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation party or otherwise. LENDER. The word "Lender" means Bank One, Colorado, NA, its successors and assigns (which is a secured party under the Code). NOTE. The word "Note" means the promissory note dated October 27, 1999, in the principal amount of $3,000,000.00 from THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for such promissory note. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation the Note and all credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Note. OBLIGATIONS OF GRANTOR. Grantor represents, warrants and covenants to Lender as follows: PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby irrevocably appoints Lender as its attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor has disclosed to Lender all tradenames and assumed names currently used by Grantor, all tradenames and assumed names used by Grantor within the previous six (6) years and all of Grantor's current business locations. Grantor will notify Lender in writing at least thirty (30) days prior to the occurrence of any of the following: (i) any changes in Grantor's name, tradename(s) or assumed name(s), or (ii) any change in Grantor's business locations) or the location of any of the Collateral. NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement, governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor; Grantor will not adjust, settle, compromise, amend or modify any account, except in good faith and in the ordinary course of business; provided, however, this exception shall automatically terminate upon the occurrence of an Event of Default or upon Lender's written request. LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations 4 10-27-99 COMMERCIAL SECURITY AGREEMENT Loan No. (Continued) Page 2 without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Colorado, without the prior written consent of Lender. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it is the owner of the Collateral and holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and insofar as the Collateral consists of accounts and general intangibles, Grantor shall deliver to Lender schedules of such Collateral, including such information as Lender may require, including without limitation names and addresses of account debtors and agings of accounts and general intangibles. Insofar as the Collateral consists of inventory and equipment, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and governmental charges or levies upon the Collateral and provide Lender evidence of such payment upon its request. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor is conducting and will continue to conduct Grantor's businesses in material compliance with all federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions applicable to Grantor's businesses and to the production, disposition or use of the Collateral, including without limitation, those pertaining to health and environmental matters such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (collectively, together with any subsequent amendments, hereinafter called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous Substance Waste Amendments of 1984 (collectively, together with any subsequent amendments, hereinafter called "RCRA"). Grantor represents and warrants that (i) none of the operations of Grantor is the subject of a federal, state or local investigation evaluating whether any material remedial action is needed to respond to a release or disposal of any toxic or hazardous substance or solid waste into the environment; (ii) Grantor has not filed any notice under any federal, state or local law indicating that Grantor is responsible for the release into the environment, the disposal on any premises in which Grantor is conducting its businesses or the improper storage, of any material amount of any toxic or hazardous substance or solid waste or that any such toxic or hazardous substance or solid waste has been released, disposed of or is improperly stored, upon any premises on which Grantor is conducting its businesses; and (iii) Grantor otherwise does not have any known material contingent liability in connection with the release into the environment, disposal or the improper storage, of any such toxic or hazardous substance or solid waste. The terms "hazardous substance" and "release", as used herein, shall have the meanings specified in CERCLA, and the terms "solid waste" and "disposal", as used herein, shall have the meanings specified in RCRA; provided, however, that to the extent that the laws of the State of Colorado establish meanings for such terms which are broader than that specified in either CERCLA or RCRA, such broader meanings shall apply. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the termination of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risk insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Application of insurance proceeds to the payment of the Indebtedness will not extend, postpone or waive any payments otherwise due, or change the amount of such payments to be made and proceeds may be applied in such order and such amounts as Lender may elect. SOLVENCY OF GRANTOR. As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Grantor at the time of the execution of this Agreement, (i) Grantor is and will be solvent, (ii) the fair salable value of Grantor's assets exceeds and will continue to exceed Grantor's liabilities (both fixed and contingent), (iii) Grantor is paying and will continue to be able to pay its debts as they mature, and (iv) if Grantor is not an individual, Grantor has and will have sufficient capital to carry on Grantor's businesses and all businesses in which Grantor is about to engage. LIEN NOT RELEASED. The lien, security interest and other security rights of Lender hereunder shall not be impaired by any indulgence, moratorium or release granted by Lender, including but not limited to, the following: (a) any renewal, extension, increase or modification of any of the Indebtedness; (b) any surrender, compromise, release, renewal, extension, exchange or substitution granted in respect of any of the Collateral; (c) any release or indulgence granted to any endorser, guarantor or surety of any of the Indebtedness; (d) any release of any other collateral for any of the Indebtedness; (e) any acquisition of any additional collateral for any of the Indebtedness; and (f) any waiver or failure to exercise any right, power or remedy granted herein, by law or in any of the Related Documents. REQUEST FOR ENVIRONMENTAL INSPECTIONS. Upon Lender's reasonable request from time to time, Grantor will obtain at Grantor's expense an inspection or audit report(s) addressed to Lender of Grantor's operations from an engineering or consulting firm approved by Lender, indicating the presence or absence of toxic and hazardous substances, underground storage tanks and solid waste on any premises in which Grantor is conducting a business; provided, however, Grantor will be obligated to pay for the cost of any such inspection or audit no more than one time in any twelve (12) month period unless Lender has reason to believe that toxic or hazardous substance or solid 5 10-27-99 COMMERCIAL SECURITY AGREEMENT Loan No. (Continued) Page 3 wastes have been dumped or released on any such premises. If Grantor fails to order or obtain an inspection or audit within ten (10) days after Lender's request, Lender may at its option order such inspection or audit, and Grantor grants to Lender and its agents, employees, contractors and consultants access to the premises in which it is conducting its business and a license (which is coupled with an interest and is irrevocable) to obtain inspections and audits. Grantor agrees to promptly provide Lender with a copy of the results of any such inspection or audit received by Grantor. The cost of such inspections and audits by Lender shall be a part of the Indebtedness, secured by the Collateral and payable by Grantor on demand. CHATTEL PAPER. To the extent a security interest in the chattel paper of Grantor is granted hereunder, Grantor represents and warrants that all such chattel paper have only one original counterpart and no other party other than Grantor or Lender is in actual or constructive possession of any such chattel paper. Grantor agrees that at the option of and on the request by Lender, Grantor will either deliver to Lender all originals of the chattel paper which is included in the Collateral or will mark all such chattel paper with a legend indicating that such chattel paper is subject to the security interest granted hereunder. LANDLORD'S WAIVERS. Grantor agrees that upon the request of Lender, Grantor shall cause each landlord of real property leased by Grantor at which any of the Collateral is located from time to time to execute and deliver agreements satisfactory in form and substance to Lender by which such landlord waives or subordinates any rights it may have in the Collateral. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may collect the accounts, notify account debtors to make payments directly to Lender for application to the Indebtedness and to verify the accounts with such account debtors. Lender also has the right, at the expense of Grantor, to enforce collection of such accounts and adjust, settle, compromise, sue for or foreclose on the amount owing under any such account, in the same manner and to the same extent as Grantor. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and be payable on demand by Lender. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on the Indebtedness. OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement, the Note, any of the other Related Documents or in any other agreement now existing or hereafter arising between Lender and Grantor. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender under this Agreement, the Note or any of the other Related Documents is false or misleading in any material respect. DEFAULT TO THIRD PARTY. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Grantor or any Guarantor to any third party under any agreement or undertaking. BANKRUPTCY OR INSOLVENCY. If the Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (n) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "APPLICABLE BANKRUPTCY LAW") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. LIQUIDATION, DEATH AND RELATED EVENTS. If Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if any of such parties is an individual, the death or legal incapacity of any such individual. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise dispose of the Collateral or the proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral (as a unit or in parcels) at public auction or private sale. Lender may buy the Collateral, or any portion thereof, (i) at any public sale, and (ii) at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations. Lender shall not be obligated to make any sale of Collateral regardless of a notice of sale having been given. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days prior to the date any public sale, or after which a private sale, of any of such Collateral is to be held. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Any sale of Collateral through the public trustee shall be deemed a commercially reasonable sale. APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. The receiver may be appointed by a court of competent jurisdiction upon ex parte application and without notice, notice being expressly waived. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of 6 10-27-99 COMMERCIAL SECURITY AGREEMENT Loan No. (Continued) Page 4 preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Grantor waives any right to require Lender to proceed against any third party, exhaust any other security for the Indebtedness or pursue any other right or remedy available to Lender. CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement and supercedes all prior written and oral agreements and understandings, if any, regarding same. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration in any Related Document, this Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT, AND ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP BETWEEN LENDER AND THE BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. ATTORNEYS' FEES; EXPENSES. Grantor will upon demand pay to Lender the amount of any and all costs and expenses (including without limitation, reasonable attorneys' fees and expenses) which Lender may incur in connection with (i) the perfection and preservation of the collateral assignment and security interests created under this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, (iii) the exercise or enforcement of any of the rights of Lender under this Agreement, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. TERMINATION. Upon (i) the satisfaction in full of the Indebtedness and all obligations hereunder, (ii) the termination or expiration of any commitment of Lender to extend credit that would become Indebtedness hereunder, and (iii) Lender's receipt of a written request from Grantor for the termination hereof, this Agreement and the security interests created hereby shall terminate. Upon termination of this Agreement and Grantor's written request, Lender will, at Grantor's sole cost and expense, return to Grantor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof and execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. INDEMNITY. Grantor hereby agrees to indemnify, defend and hold harmless Lender, and its officers, directors, shareholders, employees, agents and representatives (each an "Indemnified Person") from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the "Claims") which may be imposed on, incurred by or asserted against, any Indemnified Person (whether or not caused by any Indemnified Person's sole, concurrent or contributory negligence) arising in connection with the Related Documents, the Indebtedness or the Collateral (including, without limitation, the enforcement of the Related Documents and the defense of any Indemnified Person's action and/or inactions in connection with the Related Documents), except to the limited extent that the Claims against the Indemnified Person are proximately caused by such Indemnified Person's willful misconduct. The indemnification provided for in this Section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. NOTICES. All notices required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). POWER OF ATTORNEY. Grantor hereby irrevocably appoints Lender as its true and lawful attorney-in-fact, such power of attorney being coupled with an interest, with full power of substitution to do the following in the place and stead of Grantor and in the name of Grantor: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns; provided, however, Grantor's rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Lender. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right to thereafter demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender 7 10-27-99 COMMERCIAL SECURITY AGREEMENT Loan No. (Continued) Page 5 GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER 27, 1999. GRANTOR: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION By: /s/ JEFFREY H. MARGOLIS -------------------------------------- JEFFREY H. MARGOLIS, PRESIDENT AND CEO 8 [BANK-ONE LOGO] LOAN AGREEMENT - ------------------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $3,000,000.00 10-27-1999 11-04-2000 106525 328 2756603893 00480 - ------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item - ------------------------------------------------------------------------------------------------------------------
BORROWER: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION 567 SAN NICOLAS DRIVE - SUITE 360 NEWPORT BEACH, CA 92660 LENDER: Bank One, Colorado, NA Corporate Lending - Boulder 1125 17th Street Denver, CO 80217 THIS LOAN AGREEMENT BETWEEN THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION ("BORROWER") AND BANK ONE, COLORADO, NA ("LENDER") IS MADE AND EXECUTED AS OF OCTOBER 27, 1999, THIS AGREEMENT GOVERNS ALL LOANS, CREDIT FACILITIES AND/OR OTHER FINANCIAL ACCOMMODATIONS DESCRIBED HEREIN AND, UNLESS OTHERWISE AGREED TO IN WRITING BY LENDER AND BORROWER, ALL OTHER PRESENT AND FUTURE LOANS, CREDIT FACILITIES AND OTHER FINANCIAL ACCOMMODATIONS PROVIDED BY LENDER TO BORROWER. ALL SUCH LOANS, CREDIT FACILITIES AND OTHER FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL RENEWALS, EXTENSIONS AND MODIFICATIONS THEREOF, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT, AND (B) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of OCTOBER 27, 1999, and shall continue thereafter until all Loans and other obligations owing by Borrower to Lender hereunder have been paid in full and Lender has no commitments or obligations to make further Advances under the Loans to Borrower. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code as adopted in the State of Colorado. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as may be amended or modified from time to time, together with all exhibits and schedules attached hereto from time to time. ACCOUNT. The word "Account" means a trade account receivable of Borrower for goods sold or leased or for services rendered by Borrower in the ordinary course of its business. ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means any advance or other disbursement of Loan proceeds under this Agreement. BORROWER. The word "Borrower" means THE TRIZETTO GROUP, INC , A DELAWARE CORPORATION. BORROWING BASE. The words "Borrowing Base" mean 75.00% of the aggregate amount of Eligible Accounts, less the aggregate amount of letters of credit issued under the line. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral for any Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. COMMITTED SUM. The words "Committed Sum" mean an amount equal to $3,000,000.00. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain terms and conditions acceptable to Lender and in which Lender has a first lien security interest, less the amount of all returns, discounts, credits, and offsets of any nature, provided, however, unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower and to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (b) All Accounts with respect to which Borrower has furnished a payment and/or performance bond and that portion of any Accounts for or representing retainage, if any, until all prerequisites to the immediate payment of such retainage have been satisfied. (c) Accounts with respect to which goods are placed on consignment or subject to a guaranteed sale or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which the Account Debtor is not a resident of, or whose principal place of business is located outside of, the United States or its territories, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender in its sole and absolute discretion. (e) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (f) Accounts which are subject to dispute, counterclaim, or setoff. (g) Accounts with respect to which all goods have not been shipped or delivered, or all services have not been rendered, to the Account Debtor. (h) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (i) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts, or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor, or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (j) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States, except to the extent an acknowledgement of assignment to Lender of any such Accounts in compliance with the Federal Assignment of Claims Act and other applicable laws has been received by Lender. (k) Accounts which have not been paid or are not due and payable in full within ninety (90) days from the original invoice date. The entire balance of all Accounts of any single Account Debtor will be ineligible whenever 10.000% or more of the total amount outstanding on all Accounts owing by such Account Debtor is past due ninety (90) days or more. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. GRANTOR. The word "Grantor" means and includes each and all of the persons or entities granting a Security Interest in any Collateral for any of the Loans. GUARANTOR. The word "Guarantor" means and includes without limitation, each and all of the guarantors, sureties, and accommodation parties for any of the Loans. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and accrued interest thereon, together with all other liabilities, costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus any accrued interest thereon, owing by Borrower, or any one or more of them, to Lender of any kind or character, now existing or hereafter arising, as well as all present and future claims by Lender against Borrower, or any one or more of them, and all renewals, extensions, modifications, substitutions and rearrangements of any of the foregoing; whether such Indebtedness arises by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, overdraft, indemnity agreement or otherwise; whether such Indebtedness is voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be liable primarily or secondarily or as debtor, maker, comaker, drawer, endorser, guarantor, surety, accommodation party or otherwise. LENDER. The word "Lender" means Bank One, Colorado, NA, its successors and assigns. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. NOTE. The word "Note" means any and all promissory note or notes which evidence Borrower's Loans in favor of Lender, as well as any 9 10-27-1999 LOAN AGREEMENT PAGE 2 LOAN NO. (CONTINUED) - ------------------------------------------------------------------------------- amendment, modification, renewal or replacement thereof. PERMITTED LIENS. The words "Permitted Liens" mean (a) hens and security interests securing Indebtedness owed by Borrower to Lender, (b) hens for taxes, assessments, or similar charges either (i) not yet due, or (ii) being contested to good faith by appropriate proceedings and for which Borrower has established adequate reserves, (c) purchase money hens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure any indebtedness permitted under this Agreement, and (d) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation the Note and all credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Note. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of security interest, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. LINE OF CREDIT. Subject to the other terms and conditions herein, Lender hereby establishes a Line of Credit for Borrower through which Lender agrees to make advances to Borrower from time to time from the effective date of this Agreement until the maturity date of the Note evidencing the Line of Credit, provided the aggregate amount of such advances outstanding at any time does not exceed the lesser of the amount equal to the Borrowing Base or an amount equal to the Committed Sum Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement. BORROWING BASE COMPLIANCE. If at any time the aggregate principal amount outstanding under the Line of Credit shall exceed the applicable Borrowing Base, Borrower shall pay to Lender an amount equal to the difference between the outstanding principal balance under the Line of Credit and the Borrowing Base. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; and (b) All Account information listed on reports and schedules delivered to Lender will be true and correct, subject to immaterial variance. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each request for an Advance, as of the date of any renewal, extension or modification of any Loan, and at all times any Loans or Lender's commitment to make Loans hereunder is outstanding. ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware and is duly qualified and in good standing in all other states in which Borrower is doing business Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents to which Borrower is a party have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body, and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower Borrower has all requisite power and authority to execute and deliver this Agreement and all other Related Documents to which Borrower is a party. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely discloses Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement and all other Related Documents to which Borrower is a party constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles. PROPERTIES. Except for Permitted Liens, Borrower is the sole owner of, and has good title to, all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last six (6) years. COMPLIANCE. Except as disclosed in writing to Lender (a) Borrower is conducting Borrower's businesses in material compliance with all applicable federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions, including without limitation, those pertaining to health or environmental matters, and (b) Borrower otherwise does not have any known material contingent liability in connection with the release into the environment, disposal or the improper storage of any toxic or hazardous substance or solid waste. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may in any one case or in the aggregate materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. All tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those that have been disclosed in writing to Lender which are presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to and approved by Lender in writing, Borrower has not entered into any Security Agreements, granted a Security Interest or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral, except in favor of Lender. LICENSES, TRADEMARKS AND PATENTS. Borrower possesses and will continue to possess all permits, licenses, trademarks, patents and rights thereto which are needed to conduct Borrower's business and Borrower's business does not conflict with or violate any valid rights of others with respect to the foregoing. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes approved by Lender and such proceeds will not be used for the purchasing or carrying of "margin stock" as defined in Regulation U issued by the Board of Governors of the Federal Reserve System. INELIGIBLE SECURITIES. No portion or any advance or Loan made hereunder shall be used directly or indirectly to purchase ineligible securities, as defined by applicable regulations of the Federal Reserve Board, underwritten by Lender or any other affiliate of Banc One Corporation during the underwriting period and for 30 days thereafter. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's chief executive office if Borrower has more than one place of business, is located at 567 SAN NICOLAS DRIVE - SUITE 360, NEWPORT BEACH, CA 92660. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending the Loans to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect during the term of this Agreement. 10 10-27-1999 LOAN AGREEMENT PAGE 3 LOAN NO. (CONTINUED) - ------------------------------------------------------------------------------- AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: DEPOSITORY RELATIONSHIP. Establish and maintain its primary operating account(s) with Lender. LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor, and (c) the creation, occurrence or assumption by Borrower of any actual or contingent liabilities not permitted under this Agreement. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine, audit and make and take away copies or reproductions of Borrower's books and records at all reasonable times. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet, income statement, and statement of changes in financial position for the year ended, audited by a certified public accountant satisfactory to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender. In connection with all policies covering assets in which Lender holds or is offered a Security Interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer, (b) the risks insured, (c) the amount of the policy, (d) the properties insured, (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values, and (f) the expiration date of the policy. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN FEES AND CHARGES. In addition to all other agreed upon fees and charges, pay the following: $6,250.00 FACILITY FEE. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits; provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting principles. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act, all applicable environmental statutes, rules, regulations and ordinances and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all federal, state and local environmental laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities, and furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. BORROWING BASE CERTIFICATE. Contemporaneously with each request for an Advance under the Line of Credit, Borrower shall deliver to Lender a borrowing base certificate, in form and detail satisfactory to Lender, along with such supporting documentation as Lender may request, including without limitation, an accounts receivable aging report and/or a list or schedule of Borrower's accounts receivable, inventory and/or equipment. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: MAINTAIN BASIC BUSINESS. Engage in any business activities substantially different than those in which Borrower is presently engaged. CONTINUITY OF OPERATIONS. Cease operations, liquidate, dissolve or merge or consolidate with or into any other entity. INDEBTEDNESS. Create, incur or assume additional indebtedness for borrowed money, including capital leases, or guarantee any indebtedness owing by others, other than (a) current unsecured trade debt incurred in the ordinary course of business, (b) indebtedness owing to Lender, (c) borrowings outstanding as of the date hereof and disclosed to Lender in writing, and (d) any borrowings otherwise approved by Lender in writing. LIENS. Mortgage, assign, pledge, grant a security interest in or otherwise encumber Borrower's assets, except as allowed as a Permitted Lien. TRANSFER OF ASSETS. Transfer, sell or otherwise dispose of any of Borrower's assets other than in the ordinary course of business. INVESTMENTS. Invest in, or purchase, create, form or acquire any interest in, any other enterprise or entity. LOANS. Make any loans to any person or entity. DIVIDENDS. Pay any dividends on Borrower's capital stock or purchase, redeem, retire or otherwise acquire any of Borrower's capital stock or alter or amend Borrower's capital structure. AFFILIATES. Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable than would be obtained in a comparable arm's length transaction with a person or entity not an Affiliate of Borrower. As used herein, the term "Affiliate" means any individual or entity directly or indirectly controlling, controlled by or under common control with, another entity or individual. CONDITIONS PRECEDENT TO ADVANCES. Lender's obligation to make any Advances or to provide any other financial accommodations to or 11 10-27-1999 LOAN AGREEMENT PAGE 4 LOAN NO. (CONTINUED) - -------------------------------------------------------------------------------- for the benefit of Borrower hereunder shall be subject to the conditions precedent that as of the date of such advance or disbursement and after giving effect thereto (a) all representations and warranties made to Lender in this Agreement and the Related Documents shall be true and correct as of and as if made on such date, (b) no material adverse change in the financial condition of Borrower or any Guarantor since the effective date of the most recent financial statements furnished to Lender, or to the value of any Collateral, shall have occurred and be continuing, (c) no event has occurred and is continuing, or would result from the requested advance or disbursement, which with notice or lapse of time, or both, would constitute an Event of Default, (d) no Guarantor has sought, claimed or otherwise attempted to limit, modify or revoke such Guarantor's guaranty of any Loan, and (e) Lender has received all Related Documents appropriately executed by Borrower and all other proper parties. ADDENDUM. An addendum, titled "ADDENDUM", is attached to this document and by this reference is made a part of this document just as if all the provisions, terms and conditions of the ADDENDUM had been fully set forth in this document RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or any other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shalt constitute an Event of Default under this Agreement DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on any of the Indebtedness. OTHER DEFAULTS. Failure of Borrower, any Guarantor or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement, the Note or in any of the other Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement now existing or hereafter arising between Lender and Borrower. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender under this Agreement or the Related Documents is false or misleading in any material respect. DEFAULT TO THIRD PARTY. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Borrower, Grantor or any Guarantor to any third party under any agreement or undertaking. BANKRUPTCY OR INSOLVENCY. If the Borrower, Grantor or any Guarantor: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "APPLICABLE BANKRUPTCY LAW") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party. LIQUIDATION, DEATH AND RELATED EVENTS. If Borrower, Grantor or any Guarantor is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if any of such parties is an individual, the death or legal incapacity of any such individual. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, Lender may, at its option, without further notice or demand, (a) terminate all commitments and obligations of Lender to make Loans to Borrower, if any, (b) declare all Loans and any other Indebtedness immediately due and payable, (c) refuse to advance any additional amounts under the Note or to provide any other financial accommodations under this Agreement, or (d) exercise all the rights and remedies provided in the Note or in any of the Related Documents or available at law, in equity, or otherwise; provided, however, if any Event of Default of the type described in the "Bankruptcy or Insolvency" subsection above shall occur, all Loans and any other Indebtedness shall automatically become due and payable, without any notice, demand or action by Lender. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without regard to any conflict of laws or provisions thereof. JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT, AND ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP BETWEEN LENDER AND THE BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER RELATED DOCUMENTS. ARBITRATION. Lender and Borrower agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Agreement, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be resolved by binding arbitration pursuant to the Commercial Rules of the American Arbitration Association ("AAA"). Any arbitration proceeding held pursuant to this arbitration provision shall be conducted in the city nearest the Borrower's address having an AAA regional office, or at any other place selected by mutual agreement of the parties. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This arbitration provision shall not limit the right of either party during any dispute, claim or controversy to seek, use, and employ ancillary, or preliminary rights and/or remedies, judicial or otherwise, for the purposes of realizing upon, preserving, protecting, foreclosing upon or proceeding under forcible entry and detainer for possession of, any real or personal property, and any such action shall not be deemed an election of remedies. Such remedies include, without limitation, obtaining injunctive relief or a temporary restraining order, invoking a power of sale under any deed of trust or mortgage, obtaining a writ of attachment or imposition of a receivership, or exercising any rights relating to personal property, including exercising the right of set-off, or taking or disposing of such property with or without judicial process pursuant to the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of an act, or exercise of any right or remedy, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated; provided, however that no arbitrator shall have the right or the power to enjoin or restrain any act of either party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. The statute of limitations, estoppel, waiver, laches and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of any action for these purposes. The Federal Arbitration Act (Title 9 of the United States Code) shall apply to the construction, interpretation, and enforcement of this arbitration provision. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have abut Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of 12 10-27-1999 LOAN AGREEMENT PAGE 5 LOAN NO. (CONTINUED) - -------------------------------------------------------------------------------- such participation interests. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may hire one or more attorneys to help collect the Indebtedness if Borrower does not pay, and Borrower will pay Lender's reasonable attorneys' fees. NOTICES. All notices required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute the same document. Signature pages may be detached from the counterparts to a single copy of this Agreement to physically form one document. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor or Guarantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS EXECUTED AS OF THE DATE SET FORTH ABOVE. BORROWER: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION BY: /s/ JEFFREY H. MARGOLIS -------------------------------------- JEFFREY H. MARGOLIS, PRESIDENT AND CEO LENDER: BANK ONE, COLORADO, NA BY: -------------------------------------- AUTHORIZED OFFICER 13 ADDENDUM BORROWER: LENDER: THE TRIZETTO GROUP, INC. Bank One, Colorado, NA A DELAWARE CORPORATION Corporate Lending -- Boulder 567 SAN NICOLAS DRIVE, SUITE 360 1125 17th Street NEWPORT BEACH, CA 92660 Denver, Co. 80217 THIS ADDENDUM IS ATTACHED TO AND BY THIS REFERENCE IS MADE A PART OF THE LOAN AGREEMENT DATED OCTOBER 27, 1999, AND EXECUTED IN CONNECTION WITH A LOAN OR OTHER FINANCIAL ACCOMMODATIONS BETWEEN BANK ONE, COLORADO, NA (THE "LENDER") AND THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION (THE "BORROWER"). ADDITIONAL PROVISION: "Notwithstanding any other provision of this Loan Agreement to the contrary." ADDITIONAL REPRESENTATIONS AND WARRANTIES - YEAR 2000. Borrower further represents and warrants to Lender, as of the date of this Agreement, as of the date of each request for an advance or disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists hereafter, that: (A) All devices, systems, machinery, information technology, computer software and hardware, and other date sensitive technology (jointly and severally the "Systems") necessary for Borrower to carry on its business as presently conducted and as contemplated to be conducted in the future are Year 2000 Compliant or will be Year 2000 Compliant within a period of time calculated to result in no material disruption of any of Borrower's business operations. For purposes of these provisions, "Year 2000 Compliant" means that such Systems are designed to be used prior to, during and after the Gregorian calendar year 2000 A.D. and will operate during each such time period without error relating to date data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. (B) Borrower has: (1) undertaken a detailed inventory, review, and assessment of all areas within its business and operations that could be adversely affected by the failure of Borrower to be Year 2000 Compliant on a timely basis; (2) developed a detailed plan and time line for becoming Year 2000 Compliant on a timely basis, and (3) to date, implemented that plan in accordance with that timetable in all material respects. (C) Borrower has made written inquiry of each of its key suppliers, vendors, and customers, and has obtained in writing confirmations from all such persons, as to whether such persons have initiated programs to become Year 2000 Compliant and on the basis of such confirmations, Borrower reasonably believes that all such persons will be or become so compliant. For purposes hereof, "key suppliers, vendors, and customers" refers to those suppliers, vendors, and customers of Borrower whose business failure would, with reasonable probability, result in a material adverse change in the business, properties, condition (financial or otherwise), or prospects of Borrower. For purposes of this paragraph, Lender, as a lender of funds under the terms of any Loan, confirms to Borrower that Lender has initiated its own corporate-wide Year 2000 program with respect to its lending activities. (D) The fair market value of all real and personal property, if any, pledged to Lender as collateral to secure any Loan is not and shall not be less than currently anticipated or subject to substantial deterioration in value because of the failure of such collateral to be Year 2000 Compliant. ADDITIONAL AFFIRMATIVE COVENANT - YEAR 2000. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: (A) Furnish such additional information, statements and other reports with respect to Borrower's activities, course of action and progress towards becoming Year 2000 Compliant as Lender may request from time to time. (B) In the event of any change in circumstances that causes or will likely cause any of Borrower's representations and warranties with respect to its being or becoming Year 2000 Compliant to no longer be true (hereinafter, referred to as a "Change in Circumstances") then Borrower shall promptly, and in any event within ten (10) days of receipt of information regarding a Change in Circumstances, provide Lender with written notice (the "Year 2000 Notice") that describes in reasonable detail the Change in Circumstances and how such Change in Circumstances caused or will likely cause Borrower's representations and warranties with respect to being or becoming Year 2000 Compliant to no longer be true. Borrower shall, within ten (10) days of a request, also provide Lender with any additional information Lender requests of Borrower in connection with the Year 2000 Notice and/or a Change in Circumstances. (C) Promptly upon its becoming available, furnish to Lender one copy of each financial statement, report, notice, or proxy statement sent by Borrower to stockholders generally and of each regular or periodic report, registration statement or prospectus filed by Borrower with any securities exchange or the Securities and Exchange Commission or any successor agency, and of any order issued by any Governmental Authority in any proceeding to which Borrower is a party. For purposes of these provisions, "Governmental Authority" shall mean any government (or any political subdivision or jurisdiction thereof), court, bureau, agency or other governmental entity having or asserting jurisdiction over Borrower or any of its business, operations or properties. (D) Give any representative of Lender access during all business hours to, and permit such representative to examine, copy or make excerpts from, any and all books, records and documents in the possession of Borrower and relating to its affairs, and to inspect any of the properties and Systems of Borrower, and to project test the Systems to determine if they are Year 2000 Compliant in an integrated environment, all at the sole cost and expense of Lender. Acknowledged by: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION By: /s/ JEFFREY H. MARGOLIS -------------------------------------- JEFFREY H. MARGOLIS, PRESIDENT AND CEO 14 ADDENDUM BORROWER: THE TRIZETTO GROUP, INC. LENDER: BANK ONE, COLORADO, NA A DELAWARE CORPORATION 1125 17th STREET 567 SAN NICOLAS DRIVE, PO BOX 5586 TA SUITE 360 DENVER, CO. 80217 NEWPORT BEACH, CA 92660 This ADDENDUM is attached to and by this reference is made a part of the Loan Agreement, dated October 27, 1999 executed by Lender and Borrower ("Loan Agreement"). ADDITIONAL DEFINITIONS. The Loan Agreement and this Addendum are hereinafter referred to as the "Agreement". Capitalized terms used herein shall have the meanings set forth in the Loan Agreement and the following terms shall have the following meanings "ADVANCE" means an advance by Lender to Borrower under the Line of Credit. "COMMITMENT" means the agreement of Lender hereunder to issue Letters of Credit pursuant to the terms and conditions to Letter of Credit Agreements and to make Advances pursuant to the terms and conditions to the Agreement "EXISTING LETTER(S) OF CREDIT" means any and all letter(s) of credit issued by Lender at the request of Borrower prior to the date of this Agreement, which expire after the date of this Agreement. "LETTER OF CREDIT AGREEMENT" means Lender's standard form Application and Agreement for Irrevocable Standby Letter of Credit, Lender's standard form Application for Irrevocable Commercial Letter of Credit and Commercial Letter of Credit Agreement, or other standard application and agreement for letters of credit in use by Lender from time to time. "LETTERS OF CREDIT" means the letters of credit to Lender's standard form from time to time issued pursuant to this Agreement and any Existing Letters of Credit. "REIMBURSEMENT AMOUNT" means the amount Borrower is obligated to pay to Lender under a Letter of Credit Agreement in respect of a draft drawn or drawn and accepted under the respective Letter of Credit, which amount shall be the amount of the draft or acceptance and all costs, expenses, fees, and other amounts then payable by Borrower to Lender under the Letter of Credit Agreement. ISSUANCE OF LETTERS OF CREDIT. Subject to the terms and conditions of this Agreement and the Letter of Credit Agreements and subject to the policies, procedures, and requirements of Lender in effect from time to time for issuance of Letters of Credit (including, without limitation, payment of letter of credit fees), Lender agrees to issue, from time to time on or before the maturity date of the Note, Letters of Credit upon request by and for the account of Borrower, provided that as to each requested Letter of Credit Borrower has delivered to Lender a completed and executed Letter of Credit Agreement, and provided further that the last date for payment of drafts drawn or drawn and accepted under a requested Letter of Credit is at least thirty (30) days before the maturity date of the Note. Each reference in this Agreement to "issue" or "issuance" or other forms of such words in relation to Letters of Credit shall also include any extension or renewal of a Letter of Credit. Upon occurrence of an event of default, or any condition or event that with notice, passage of time, or both would be an Event of Default, Lender, in its absolute and sole discretion and without notice, may suspend the commitment to issue Letters of Credit. In addition, upon occurrence of an Event of Default, Lender, in its absolute and sole discretion and without notice, may terminate the commitment to issue Letters of Credit. ISSUANCE PROCEDURE. To obtain a Letter of Credit, Borrower shall complete and execute a Letter of Credit Agreement and submit it to the letter of credit department of Lender. Upon receipt of a completed and executed Letter of Credit Agreement, Lender will process the application in accordance with the policies, procedures, and requirements of Lender then in effect. If the application meets the requirements of Lender and is within the policies of Lender then in effect, Lender will issue the requested Letter of Credit. REIMBURSEMENT OF LENDER FOR PAYMENT OF DRAFTS DRAWN OR DRAWN AND ACCEPTED UNDER LETTERS OF CREDIT. The obligation of Borrower to reimburse Lender for payment by Lender of drafts drawn or drawn and accepted under a Letter of Credit shall be as provided in the respective Letter of Credit Agreement. Lender will notify Borrower of payment by Lender of a draft drawn or drawn and accepted under a Letter of Credit and of the respective Reimbursement Amount and will give Borrower the election (i) to pay the Reimbursement Amount pursuant to the respective Letter of Credit Agreement or (ii) to pay the Reimbursement Amount by Lender making an Advance subject to the terms and conditions of this Agreement and applying the proceeds of the Advance to pay the Reimbursement Amount. If Borrower does not communicate to Lender its election within two Business Days after notification by Lender of payment of the draft or acceptance, Borrower shall be deemed to have elected to pay the Reimbursement Amount by Lender making an Advance hereunder, provided that if the terms and conditions in this Agreement for an Advance hereunder are not satisfied, Borrower shall be deemed to have elected to pay the Reimbursement Amount pursuant to the Letter of Credit Agreement. Each Advance to pay a Reimbursement Amount shall be dated the date that Lender pays the respective draft or acceptance and shall accrue interest from and after such date. If Borrower is to pay the Reimbursement Amount pursuant to the Letter of Credit Agreement, Borrower shall also pay to Lender interest on the Reimbursement Amount from and including the date Lender pays the respective draft or acceptance at the rate per annum at which interest is then accruing under the Note until the Reimbursement Amount and such interest are paid in full, provided that if Borrower fails to pay the Reimbursement Amount and accrued interest thereon within five (5) days after notification by Lender to Borrower of payment of the respective draft or acceptance, interest thereafter shall accrue at the interest rate applicable to past-due payments under the Note. Such interest shall be computed on the basis of a 360-day year and accrue on a daily basis for the actual number of days elapsed. Notwithstanding the above, if Borrower elects or is deemed to have elected to pay the Reimbursement Amount pursuant to the Letter of Credit Agreement and fails to pay the Reimbursement Amount and interest thereon within five (5) days after notification by Lender to Borrower, Lender, in its absolute and sole discretion and without notice to Borrower and regardless of whether the terms and conditions in this Agreement for Advances are satisfied, may make an Advance under this Agreement in the amount of the Reimbursement Amount and accrued interest thereon and apply the proceeds of such Advance to pay the Reimbursement Amount and accrued interest. LETTERS OF CREDIT AND ADVANCES. Letters of Credit may be issued by Lender at the oral or written request of the respective person or persons designated in the Agreement to request Advances. Such person or persons are hereby authorized by Borrower to request Letters of Credit and Advances, to execute and deliver Letter of Credit Agreements on behalf of Borrower, and to direct disposition of the proceeds of Advances until written notice of the revocation of such authority is received from Borrower by Lender and Lender has had a reasonable time to act upon such notice. Lender shall have no duty to monitor for Borrower or to report to Borrower the use of Letters or Credit or proceeds of Advances Advances shall be disbursed by Lender in the manner agreed upon by Lender and Borrower from time to time. LIMIT ON LETTERS OF CREDIT AND ADVANCES. Anything in the Related Documents to the contrary notwithstanding, the sum from time to time of (i) the aggregate amount of outstanding and undrawn Letters of Credit, (ii) the aggregate amount of outstanding and unpaid drafts drawn or drawn and accepted under Letters of Credit, (iii) the aggregate amount of unpaid Reimbursement Amounts, and (iv) the amount of outstanding and unpaid Advances shall not exceed $3,000,000.00, provided, that if such sum at any time exceeds such amount, Borrower, without notice or demand, shall immediately make a payment to Lender in an amount equal to the sum of (A) such excess and (B) accrued and unpaid interest thereon. 1 15 COLLATERAL UPON EVENT OF DEFAULT. Upon an event of default and demand by Lender in its absolute and sole discretion, Borrower shall immediately deliver to Lender as security for all obligations of Borrower under the Related Documents (including, without limitation, the obligation to pay Reimbursement Amounts), immediately available funds in an amount equal to the sum of (i) the aggregate amount of outstanding and undrawn Letters of Credit, and (ii) the aggregate amount of outstanding and unpaid drafts drawn or drawn and accepted under Letters of Credit. Borrower hereby grants to Lender a security interest in all such funds delivered to Lender to secure payment and performance of the Indebtedness. CONDITIONS PRECEDENT TO LETTERS OF CREDIT. Lender's obligation to issue a Letter of Credit shall be subject to the conditions precedent to Advances set forth in the loan Agreement being satisfied as of the date of the issuance of such Letter of Credit and after giving effect thereto. Delay or failure by Lender to insist on satisfaction of any condition precedent to the issuance of a Letter of Credit or the making of an Advance shall not be a waiver of such condition precedent or any other condition precedent. If Borrower is unable to satisfy any condition precedent to the issuance of a Letter of Credit or making an Advance, the issuance of the Letter of Credit or the making of the Advance shall not preclude Lender from thereafter declaring the condition or event causing such inability to be an event of default. Dated this___________day of______________, 199___. BORROWER: THE TRIZETTO GROUP, INC., a Delaware corporation By: /s/ JEFFREY H. MARGOLIS -------------------------------------- JEFFREY H. MARGOLIS, PRESIDENT AND CEO LENDER: BANK ONE, COLORADO, NA a national banking association By: -------------------------------------- Robert O'Leary, Assistant Vice President 2 16 ADDENDUM - -------------------------------------------------------------------------------- BORROWER: THE TRIZETTO GROUP, INC. LENDER: BANK ONE, COLORADO, NA A DELAWARE CORPORATION CORPORATE LENDING BOULDER 567 SAN NICOLAS DRIVE, 1125 17" STREET SUITE 360 DENVER, CO. 80217 NEWPORT BEACH, CA 92660 - -------------------------------------------------------------------------------- THIS ADDENDUM IS ATTACHED TO AND BY THIS REFERENCE IS MADE A PART OF THE BUSINESS LOAN AGREEMENT DATED OCTOBER 27, 1999, AND EXECUTED BY BANK ONE, COLORADO, NA AND THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION. ADDITIONAL AFFIRMATIVE COVENANT - CURRENT RATIO. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply at all times with the following covenant and ratio: Maintain a ratio of Liquid Assets plus Inventory, to current liabilities in excess of 3.00 to 1.00 (i) monthly if the principal balance outstanding is greater than zero or (ii) quarterly when the principal balance outstanding is zero. ADDITIONAL AFFIRMATIVE COVENANT - TANGIBLE NET WORTH. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply at all times with the following covenant and ratio: Maintain a Tangible Net Worth of not less than $31,000,000 (i) monthly if the principal balance outstanding is greater than zero or (ii) quarterly when the principal balance outstanding is zero. For purposes of this Agreement and to the extent the following terms are utilized in this Agreement: The term "Tangible Net Worth" shall mean Borrower's total assets excluding all intangible assets (including, without limitation, goodwill, trademarks, patents, copyrights, organization expenses, and similar intangible items) less total liabilities excluding Subordinated Debt. The term "Subordinated Debt" shall mean all indebtedness owing by Borrower which has been subordinated by written agreement to all indebtedness now or hereafter owing by Borrower to Lender, such agreement to be in form and substance acceptable to Lender. The term "Liquid Assets", shall mean Borrower's unencumbered cash, marketable securities and accounts receivable net of reserves. The term "Distributions'" shall mean all dividends and other distributions made by Borrower to its shareholders, partners, owners or members, as the case may be, other than salary, bonuses and other compensation for services expended in the current accounting period. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified as being true and correct. ADDITIONAL AFFIRMATIVE COVENANT - FINANCIAL STATEMENTS. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower will furnish Lender within thirty (30) days of each (i) month end if the principal balance outstanding is greater than zero or (ii) fiscal quarter end if the principal balance outstanding is zero, with Borrower's balance sheet and income statement for the period ended, prepared and certified, subject to year-end review adjustments, as correct to the best knowledge and belief by its chief financial officer or other person reasonably acceptable to Lender. ADDITIONAL AFFIRMATIVE COVENANT - COMPLIANCE CERTIFICATE. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply at all times with the following covenant and ratio: Unless waived in writing by Lender, provide Lender thirty (30) days after each (i) month if the principal balance outstanding is greater than zero, or (ii) fiscal quarter if the principal balance outstanding is zero, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, (a) certifying that the representations and warranties set forth in this Agreement are true and correct as to the date of the certificate and that, as of the date of the certificate, no Event of Default exists under this Agreement, and (b) demonstrating compliance with all financial covenants set forth in this Agreement. ADDITIONAL AFFIRMATIVE COVENANT - BORROWING BASE CERTIFICATE. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower will provide Lender within thirty (30) days after each (i) month if the principal balance outstanding is greater than zero, or (ii) fiscal quarter if the principal balance outstanding is zero, Borrower shall deliver to Lender, a borrowing base certificate, in form and detail satisfactory to Lender, along with such supporting documentation as Lender may request including a list or schedule of Borrower's inventory and/or equipment. ADDITIONAL AFFIRMATIVE COVENANT - ADDITIONAL REPORTING. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower will provide Lender (a) within thirty (30) days of each (i) month if the principal balance outstanding is greater than zero, or (ii) fiscal quarter if the principal balance outstanding is zero, an aging and listing of all accounts receivable prepared in accordance with generally accepted accounting principles which itemizes each account debtor by name and which states the total amount payable to Borrower and contains a breakdown indicating future amounts due and when due, current amounts due, amounts thirty (30) days past due, sixty (60) days past due and ninety (90) or more days past due, and reflecting any credit adjustments, returns and allowances; (b) within thirty (30) days of each fiscal year end, Borrower's annual projections for the year immediately following (balance sheet, income statement, cash flow) showing monthly activity forecast. 17 10-27-1997 ADDENDUM LOAN NO. (CONTINUED) PAGE 2 - -------------------------------------------------------------------------------- LINE OF CREDIT CLEARANCE. Borrower shall, at lease once during the term of the Line of Credit, reduce and maintain the outstanding principal balance of the Line of Credit to $0.00 for a period of at least thirty (30) consecutive calendar days. ADDITIONAL NEGATIVE COVENANT - CHANGE IN MANAGEMENT. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender permit a material change in the capacity, responsibility or authority of the following management personnel: Jeffrey H. Margolis and D. Brian Karr. ADDITIONAL NEGATIVE COVENANT - TRANSFER OF OWNERSHIP. Borrower further covenants and agrees with Lender that, while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender permit the sale, pledge or other transfer of any ownership interest in Borrower. Additional equity raised may be used to retire outstanding capital stock. THIS ADDENDUM IS EXECUTED OCTOBER 27, 1999. BORROWER: THE TRIZETTO GROUP, INC., A DELAWARE CORPORATION BY: /s/ JEFFREY H. MARGOLIS -------------------------------------- JEFFREY H. MARGOLIS, PRESIDENT AND CEO LENDER: BANK ONE, COLORADO, NA BY: -------------------------------------- AUTHORIZED OFFICER EX-10.22 3 FIRST MODIFICATION & RATIFICATION OF LEASE 1 EXHIBIT 10.22 FIRST MODIFICATION AND RATIFICATION OF LEASE THIS FIRST MODIFICATION AND RATIFICATION OF LEASE is made and entered into effective this 1st day of November, 1999 by and between ST. PAUL PROPERTIES, INC., a Delaware corporation ("Landlord"), and THE TRIZETTO GROUP, INC., a Delaware corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant entered into that certain Office Lease dated as of April 26, 1999, as amended by that certain Lease commencement letter signed by Landlord on September 9, 1999, and by Tenant on September 7, 1999 (hereafter collectively the "Lease"), for the rental of certain commercial real property located in the Building known as Atrium I, 6061 S. Willow Drive, Englewood, Colorado, and more particularly described in the Lease as Suite 310 (the "Leased Premises"); and WHEREAS, pursuant to Exhibit "B" to the Lease, Landlord agreed to provide an Additional Construction Credit to Tenant over and above the Construction Credit, if needed, and which amounts were to be amortized over the term of the Lease and added to the Base Rent under the Lease in accordance with Exhibit "B"; and WHEREAS, Landlord has provided an Additional Construction Credit to Tenant of One Hundred Eighteen Thousand and Fifty and No/100 Dollars ($118,050.00), towards construction of tenant improvements on the Premises; and WHEREAS, Landlord and Tenant desire to amend the Lease to reflect the increase in Base Rent payable under the Lease to reflect the amortized cost of the Additional Construction Credit. NOW, THEREFORE, in consideration of the foregoing, the agreements of the parties, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Definitions. All capitalized terms used herein not otherwise defined in this First Modification and Ratification of Lease shall have the meanings given them in the Lease. 2. Base Rent. Article 1.03H of the Lease entitled "Base Rent" shall be amended in its entirety to read as follows: Tenant shall pay total aggregate Base Rent during the term of the Lease of Two Million Five Hundred Twenty-five Thousand One Hundred Sixty-eight and 20/100 Dollars ($2,525,168.20) ($21.04/rentable square foot/year). 2 3. Monthly Installments of Base Rent. Article 1.03I of the Lease entitled "Monthly Installments of Base Rent" shall be amended by replacing the first and second paragraphs thereof with the following: Base Rent shall be payable monthly, in advance, without demand, deduction or set-off at the rate of Forty-one Thousand Three Hundred Ninety-six and 20/100 Dollars ($41,396.20) per month ($21.04/rentable square foot/year). Rent Abatement. The foregoing notwithstanding, and provided that no default (or no event which, with the passage of time or the giving of notice or both, would constitute and event of default under the Lease) shall have occurred under this Lease, Base Rent for the Premises, net of operating expenses, and net of the amortized portion of Base Rent for the Additional Construction Credit in the amount of Two Thousand Five Hundred Thirty-five and 10/100 Dollars ($2,535.10) per month, shall be abated for a period of one (1) month following the Commencement Date. In the event of any default by Tenant, the entire amount of Base Rent that was otherwise abated, as set forth above, shall be immediately due and payable. 4. Real Estate Brokers. Tenant hereby warrants and represents to Landlord that it has not dealt with or been represented by any broker in connection with its execution of this Third Modification and Ratification of Lease other than Landlord's listing agent, Venture Group Real Estate, LLC, acting as agent of Landlord, and Julien J. Studley, Inc., acting as agent of Tenant. Tenant shall be responsible for payment of any compensation or commission to its agent, Julien J. Studley, Inc., with respect to this First Modification and Ratification of Lease and Landlord shall be responsible for payment of any compensation or commission to Venture Group Real Estate, LLC, with respect to this First Modification and Ratification of Lease. Tenant agrees to indemnify and hold Landlord harmless from and against any claims for commissions or similar compensation from any or person claiming an entitlement to any such payment as a result of its representation of Tenant. In addition, Landlord agrees to indemnify and hold Tenant harmless from and against any claims for commissions or similar compensation from any other broker or person claiming an entitlement to any such payment as a result of its representation of Landlord. 5. No Offer. The submission of this First Modification and Ratification of Lease by Landlord to the Tenant is not an offer to modify or amend the Lease and is not effective until execution and delivery by both Landlord and Tenant. 6. Entire Agreement. This First Modification and Ratification of Lease contains the entire agreement between the parties as to its subject matter and supersedes any and all prior agreements, arrangements or understandings between the parties relating to the subject matter hereof. 7. Conflicts and Non-Amended Provisions. In the event of any express conflict or inconsistency between the terms of the Lease and the terms of this First Modification and Ratification of Lease, the terms of this First Modification and Ratification of Lease shall 2 3 control and govern. Except as modified above, the Landlord and Tenant hereby confirm and ratify the terms, conditions and covenants of the Lease. 8. Counterparts. This First Modification and Ratification of Lease may be executed in a number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have entered into this Agreement effective as of the date first set forth hereinabove. LANDLORD: TENANT: ST. PAUL PROPERTIES, INC., a THE TRIZETTO GROUP, INC., Delaware corporation a Delaware corporation By: /s/ R. WILLIAM INSERRA By: /s/ MJ SUNDERLAND ----------------------------- ----------------------------------- R. William Inserra Name: SR VP MJ SUNDERLAND Vice President - Title: & CFO Asset Management 3 EX-10.23 4 SECOND MODIFICATION & RATIFICATION OF LEASE 1 EXHIBIT 10.23 SECOND MODIFICATION AND RATIFICATION OF LEASE THIS SECOND MODIFICATION AND RATIFICATION OF LEASE ("Modification") is made and entered into effective this ___ day of December 1999 by and between ST. PAUL PROPERTIES, INC., a Delaware corporation ("Landlord"), and THE TRIZETTO GROUP, INC., a Delaware corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant entered into that certain Office Lease dated as of April 26, 1999, as amended by that certain Lease commencement letter signed by Landlord on September 9, 1999, and by Tenant on September 7, 1999, and by that certain First Modification and Ratification of Lease entered into effective November 1, 1999 (hereafter collectively the "Lease"), for the rental of certain commercial real property located in the Building known as Atrium I, 6061 S. Willow Drive, Englewood, Colorado, and more particularly described in the Lease as Suite 310 (the "Premises"); and WHEREAS, effective May 1, 2000, Tenant desires to expand the Premises through the addition of Suite 300 in the Building, containing approximately 22,670 rentable square feet on the third floor of the Building (the "Expansion Premises") as depicted in Exhibit A-1; and WHEREAS, Tenant desires to extend the term of the Lease for the primary Premises to be coterminous with the term of the Lease for the Expansion Premises as set forth below; and WHEREAS, Landlord is willing to modify the Lease to accommodate such desires, subject to the terms and conditions of this Modification and Landlord and Tenant desire to amend the Lease to reflect the addition of the Expansion Premises, the extension of the Lease Term and the increase in Base Rent payable under the Lease. NOW, THEREFORE, in consideration of the foregoing, the agreements of the parties, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Definitions. All capitalized terms used herein not otherwise defined in this Modification shall have the meanings given them in the Lease. 2. Additional Premises. Effective May 1, 2000, or upon substantial completion of the tenant improvements to be made to the Expansion Premises as defined in Exhibit B-1 attached hereto, whichever is later ("Expansion Premises Commencement Date"), Landlord shall lease to Tenant and Tenant shall lease from Landlord the Expansion Premises. It is expressly understood that the actual number of rentable square feet within the Expansion Premises is subject to confirmation in accordance with BOMA standards based upon the final space plan to be prepared by Landlord's architect for the Expansion Premises, and the parties agree to further amend the Lease to reflect any change in the actual size of the Expansion Premises, 2 together with the calculation of Base Rent, and all other matters that are dependent upon the size of the Expansion Premises. In addition the identification of the Leased Premises in Section 1.03 (B) of the Lease is hereby amended by adding immediately after the description of the Leased Premises the following: EXPANSION PREMISES: That part of the Building outlined on Exhibit A-1, called Suite 300, on the third floor(s) of the Building, containing approximately 22,670 rentable square feet, including tenant improvements to be made by Landlord pursuant to Exhibit B-1 to the Second Modification and Ratification of Lease. 3. Expansion Premises Commencement Date. Section 1.03(D) of the Lease is hereby amended by adding immediately after the description of the commencement date of the Lease the following: The Expansion Premises Commencement Date shall be May 1, 2000, unless delayed by Force Majeure, or as otherwise delayed as provided in Exhibit "B1 " to the Second Modification and Ratification of Lease. 4. Expansion Premises Completion Date. Section 1.03(E) of the Lease is hereby amended by adding immediately after the description of the completion date under the Lease the following: The Expansion Premises Completion Date shall be May 1, 2000, unless delayed by Force Majeure, or as otherwise delayed as provided in Exhibit "B-1" to the Second Modification and Ratification of Lease. 5. Termination Date. Section 1.03(F) of the Lease is hereby amended in its entirety by replacing the existing Termination Date of the Lease of November 30, 2004, with the following: The Termination Date of the Lease for the Premises and the Expansion Premises shall be April 30, 2006 (seventy-two (72) months following the Expansion Premises Commencement Date), unless sooner terminated as provided in this Lease, or as otherwise extended as provided in Exhibit "B-1" to the Second Modification and Ratification of Lease. 6. Expansion Premises Term. Section 1.03(G) of the Lease is hereby amended by adding immediately after the description of the Term of the Lease the following: The Term of the Lease for the Premises shall be extended so that it coincides with the expiration of the Term for the Expansion Premises. The Expansion Premises Term shall be a period of seventy-two (72) months commencing on the Expansion Premises Commencement Date and expiring at 11:59 p.m. local time 2 3 on the Termination Date, unless sooner terminated or extended as provided in this Lease. 7. Tenant's Proportionate Share. Section 1.03(J) of the Lease is amended effective on the Expansion Premises Commencement Date by adding immediately after the description of the Tenant's Proportionate Share under the Lease for the Premises the following: Tenant's Proportionate Share for the Expansion Premises shall be 17.52%. 8. Security Deposit. Section 1.03(K) of the Lease is hereby amended by increasing the security deposit for the Premises and Expansion Premises in the amount of Thirty-seven Thousand Three Hundred Eleven and 04/100 Dollars ($37,311.04), for a total security deposit of One Hundred Fifteen Thousand Twenty-seven and 29/100 Dollars ($115,027.29), which additional amount shall be payable to Landlord upon execution of this Modification. 9. Parking Spaces. Section 1.03(O) of the Lease is amended effective on the Expansion Premises Commencement Date by the addition of the following at the end of the section: During the Expansion Premises Term, Tenant shall be entitled to the additional non-exclusive use in common with Landlord and others of a maximum of seventy-four (74) parking spaces in the Building parking areas at no charge during the primary Term of the Lease. Within the foregoing parking allowance, Tenant shall be entitled during the primary Lease Term to ten (10) covered parking spaces in the Building parking area at the rate of $30.00 per parking space per month. In addition, through June 30, 2002, Tenant may be entitled to use additional parking spaces, in an amount to be determined by Landlord, on a non-reserved, non-exclusive basis in common with other tenants of the Building, in that certain parking lot adjacent to the Building parking lot and currently leased by Landlord and known as the "Sheplers" parking lot, at no additional cost to Tenant. Landlord reserves the right to strictly enforce the number of parking spaces utilized by Tenant during the term of this Lease based upon a parking ratio of 3.3 parking spaces per 1,000 rentable square feet. 10. Operating Expenses. Section 2.02 of the Lease shall be amended effective on the Expansion Premises Commencement Date by adding to the first sentence thereof immediately after the words "the 1999 base year" and immediately before the parenthetical reference "("Excess Expenses")," the following: for the Premises through November 30, 2004, and during the 2000 base year with respect to the Expansion Premises during the Expansion Premises Term and with respect to the Premises beginning on December 1, 2004. In addition, the following shall be added immediately after the last paragraph of Section 2.02: If during any calendar year of this Lease, the occupancy of the Building averages less than ninety-five percent (95%), it is agreed that the Operating Expenses with 3 4 respect to the Expansion Premises shall be computed as though the Building had been ninety-five percent (95%) occupied for such calendar year. 11. Base Rent. Effective on the Expansion Premises Commencement Date, Section 1.03(H) of the Lease entitled Base Rent, and Section 1.03(I) of the Lease entitled Monthly Installments of Base Rent, shall be amended in their entirety and replaced with the following: (a) Base Rent. Tenant shall pay Base Rent for the Premises, payable monthly in advance, without demand, deduction or set-off, in accordance with the following schedule:
Rentable Lease Annual Monthly Months Square Feet Rate Payment Payment ------ ----------- ---- ------- ------- 1-61 23,610 $21.04/rsf $496,754.40 $41,396.20 (11/8/99-11/30/2004) 62-73 23,610 $21.46/rsf $506,670.60 $42,222.55 (12/1/2004-11/30/2005) 74-78 23,610 $21.89/rsf $516,822.90 $43,068.58 (12/1/2005-4/30/2006)
(b) Expansion Premises Base Rent. In addition to the Base Rent payable with respect to the Premises, Tenant shall also pay Base Rent with respect to the Expansion Premises, payable monthly in advance, without demand, deduction or set-off, in accordance with the following schedule:
Rentable Lease Annual Monthly Months Square Feet Rate Payment Payment ------ ----------- ---- ------- ------- 1-60 22,670 $19.75/rsf $447,732.50 $37,311.04 (5/1/00-4/30/05) 61-72 22,670 $20.15/rsf $456,800.50 $38,066.71 (5/1/05-4/30/06)
12. Termination Option. Paragraph 3 of the Addendum to the Lease shall be deleted in its entirety and replaced with the following: Provided no Event of Default has occurred and is continuing, and provided that Tenant has not assigned the Lease or sublet all or any portion of the Premises or the Expansion Premises, and in the event Landlord is unable to accommodate within the Building the growth requirements of Tenant, Tenant shall have the option, in its sole discretion, to terminate the Lease with respect to the Premises and the Expansion Premises on April 4 5 30, 2005, by providing Landlord with one-hundred eighty (180) days' prior written notice of Tenant's intent to terminate the Lease with respect to the Expansion Premises, and provided that by April 30, 2005, Tenant shall pay Landlord a termination fee equal to the sum of all of Landlord's unamortized costs of leasing the Premises and Expansion Premises to Tenant, including but not limited to leasing commissions, tenant improvements and other concessions, plus an amount equal to four (4) months of the then existing Base Rent for the Premises and Expansion Premises. 13. Tenant Improvements. Landlord agrees to provide Tenant with an allowance for tenant improvements for the Expansion Premises in the amount and in the manner as set forth in the attached Exhibit B-1 - Provisions Relating To Construction Of Tenant's Expansion Premises (Finish Allowance only). 14. Right of Offer. Paragraph 2 of the Addendum to the Lease shall be deleted in its entirety and replaced with the following: During the initial Term of the Lease, Tenant shall have a right of offer, subject to existing rights granted to other tenants as of the date of this Modification, to lease any space that may become vacant and located on the second (2nd) floor of the Building as more particularly shown on Exhibit A-2 attached hereto (the "Offer Space"), if and when the Offer Space becomes "available for lease." For purposes of this right of offer, the Offer Space will be considered to be "available for lease" if (i) no bona fide written lease agreement is currently in force or effect with respect to such space, (ii) the space becomes vacant, or will become vacant, because an existing tenant's lease has or will expire or be terminated with no renewal or extension options subject to being exercised with respect to such space, and (iii) Landlord makes the Offer Space available for leasing to others. Tenant's right of offer with respect to such Offer Space shall be upon the following terms and conditions: a) In the event that (i) the Offer Space, or any part thereof, becomes or is about to become available for lease as provided above, Landlord will notify Tenant of the rental terms on which it would be willing to lease the Offer Space to Tenant, and Tenant shall have a right of offer to lease that portion of the Offer Space identified in Landlord's notice, subject to existing rights granted to other tenants as of the date of this Modification, at the rent and on the terms and conditions contained in Landlord's notice. b) The right of offer will be exercised by Tenant signing a lease amendment with respect to the subject portion of the Offer Space at the rent and on the terms set forth in Landlord's notice. Tenant shall accept or reject the offer contained in Landlord's notice within five business (5) days after the receipt of Landlord's notice. If an amendment incorporating the terms contained in Landlord's notice is not signed within five business (5) days following receipt of Landlord's notice, time being strictly of the essence, Landlord will have the right to lease all or a portion of the Offer Space free of the rights of Tenant under this 5 6 Paragraph, and Tenant's right of offer granted herein shall be null and void. Any space leased by Tenant will be added to the Premises as of the date provided in the proposed amendment. c) Landlord is under no obligation to offer for lease all or any portion of the Offer Space to Tenant or any other person. d) Notwithstanding any other provision set forth above, it is agreed that Tenant shall not be permitted to exercise any of its rights contained in this Paragraph 14 at any time when the Lease is not in effect or at any time when an Event of Default exists, (ii) in the event that Tenant assigns the Lease or sublets any portion of the Premises or the Expansion Premises at any time, and (iii) Tenant may not exercise the right contained in this Paragraph 14 if the effective date of the addition of the Offer Space to the Premises previously leased would be at any time during the last year of the then existing term of the Lease. e) In the event that Tenant fails to exercise the foregoing right of offer as provided in this Paragraph 14, time being strictly of the essence, Tenant's right of offer shall be null and void. f) Tenant acknowledges that it is only being granted a right of offer that is subject and subordinate to the rights of any existing tenant with pre-existing rights of refusal, rights of offer, or options to lease, as of the date of this Modification. g) In no event shall Landlord be responsible for any brokerage commission for any real estate broker retained by Tenant with respect to this right of first offer. 15. Monument Signage. Provided that Tenant is not then in default of the Lease, and provided that Tenant has not assigned this Lease, nor sublet all or any portion of the Premises or the Expansion Premises, Landlord shall permit Tenant to utilize the Building monument signage located on the east side or west side of the Building, but not both. All signage plans shall be subject to Landlord's approval, and further shall comply with all laws governing use of such signage, including but not limited to the those restrictions imposed by the Denver Technological Center Architectural Control Committee and the City of Greenwood Village, Colorado. Tenant, at its sole cost and expense, shall be responsible for costs related to such monument signage. 16. Real Estate Brokers. Each of the parties hereto hereby warrants and represents to the other party that it has not dealt with or been represented by any broker in connection with its execution of this Modification other than Landlord's listing agent, Venture Group Real Estate, LLC, acting as agent of Landlord, and Julien J. Studley, Inc., acting as agent-of Tenant. Landlord shall be responsible for payment of any compensation or commission to Venture Group Real Estate, LLC, and Julien J. Studley, Inc., with respect to this Modification. Tenant agrees to indemnify and hold Landlord harmless from and against any other claims for commissions or similar compensation from any other person claiming an entitlement to any such payment as a result of its representation of Tenant. In addition, Landlord agrees to indemnify and hold Tenant harmless from and against any claims for commissions or similar 6 7 compensation from any other broker or person claiming an entitlement to any such payment as a result of its representation of Landlord. 17. Performance of Obligations. Tenant hereby acknowledges and confirms that, as of the date hereof, Landlord has performed all obligations on the part of the Landlord under the Lease and that Tenant has no claims against Landlord or claims of offset against any rent or other sums payable by Tenant under the Lease. 18. Conflicts and Non-Amended Provisions. In the event of any express conflict or inconsistency between the terms of the Lease and the terms of this Modification, the terms of this Modification shall control and govern. In all other respects, the terms, covenants and conditions of the Lease are hereby ratified, reaffirmed and republished in their entirety. 19. Condition Precedent. This Modification, and Tenant's right to lease the Expansion Space, is expressly conditioned upon the Expansion Premises being available to lease, and is subject to pre-existing rights of existing tenants in the Building. In the event that any tenants within the Building exercise any pre-existing rights to the Expansion Space, time being strictly of the essence, this Modification shall be null and void. 20. No Offer. The submission of this Modification by Landlord to the Tenant is not an offer to modify or amend the Lease and is not effective until execution and delivery by both Landlord and Tenant. 21. Entire Agreement. This Modification contains the entire agreement between the parties as to its subject matter and supersedes any and all prior agreements, arrangements or understandings between the parties relating to the subject matter hereof. 22. Counterparts. This Modification may be executed in a number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have entered into this Modification effective as of the date first set forth hereinabove. LANDLORD: TENANT: ST. PAUL PROPERTIES, INC., a THE TRIZETTO GROUP, INC., Delaware corporation a Delaware corporation By: /s/ R. WILLIAM INSERRA By: /s/ MJ SUNDERLAND ----------------------------- ----------------------------------- R. William Inserra Name: MJ SUNDERLAND Vice President - Title: SR VP, CFO Asset Management 7 8 EXHIBIT "B-1" PROVISIONS RELATING TO CONSTRUCTION OF TENANT'S EXPANSION PREMISES (FINISH ALLOWANCE ONLY) 1. Landlord will provide Tenant with a construction credit in the sum of up to Fifteen and No/100 Dollars ($15.00) per rentable square foot of the Expansion Premises, which equals Three Hundred Forty Thousand Fifty and No/100 Dollars ($340,050.00) (the "Construction Credit"), which may be used only against the cost of design and construction by Landlord of Improvements or alterations permanently installed and incorporated in the realty of the Expansion Premises or the Premises, including space plans and working drawings of the Expansion Premises (excluding specifically fixtures, furniture and equipment), as contemplated under the plans and specifications and working drawings to be prepared by an architect selected by Tenant, and subject to Landlord's reasonable approval, and to be initialed by Tenant and by Landlord for identification and approval (the "Plans"); provided, however, that Landlord shall provide Tenant with one space plan for the Expansion Premises at no charge (the cost of any additional space plans and all working drawings shall be paid for out of the Construction Credit). Landlord will cause such work (the "Work") to be performed in a good and workmanlike manner and in accordance with the Plans, using Landlord's standard building materials (unless otherwise specified by Tenant), and using one of Landlord's approved contractors for the Building. All Work performed shall be subject to Landlord's review and approval, including but not limited to administration of the Work, which administration shall be subject to a construction management fee payable to Landlord out of the Construction Credit of one percent (1%) of the Construction Credit, which is equal to Three Thousand Four Hundred and 50/100 Dollars ($3,400.50). All Work shall also be subject to the reasonable approval of the architect. If the Construction Credit is not used within six months of the Commencement Date, the unused portion shall revert back to Landlord. 2. In the event the cost of the Work exceeds the Construction Credit, Landlord agrees to provide an additional Construction Credit (the "Additional Construction Credit") of up to Three and No/100 Dollars ($3.00) per rentable square foot, which equals Sixty-eight Thousand Ten and No/100 Dollars ($68,010.00) provided the cost of any such Additional Construction Credit shall increase the Base Rent under the Lease for the Premises and the Expansion Premises by amortizing such Additional Construction Credit over the Term at the rate of eleven percent (11%) per annum, compounded monthly, and further provided, that Landlord and Tenant shall enter into an amendment to this Lease memorializing the amount of the Additional Construction Credit used, and the new Base Rent for the Premises and the Expansion Premises. Any portion of the Additional Construction Credit used by Tenant shall also be subject to a one percent (1%) construction management fee payable to Landlord out of the Additional Construction Credit. Tenant shall have the option of reimbursing Landlord the Additional Construction Credit amounts provided by Landlord within thirty (30) days of the final accounting of such costs. 3. All material and labor selected by Tenant must be readily available in Denver, Colorado. Tenant agrees that promptly after the execution of the Modification, Tenant will 8 9 advise Landlord of all selections or designations as to paint, color and materials, if other than Landlord's standard materials. 4. Any additional work which Landlord may agree to perform, or cost of changes or any materials or installations other than Landlord standard materials or installations which Landlord may agree to obtain over and above the Construction Credit, or the Additional Construction Credit if utilized by Tenant, (to be known as "Tenant's Overstandard Work"), shall be procured at a cost, plus 5% thereof as an administration payment. Costs include but are not limited to so-called "general conditions" (e.g., trash, clean-up and hauling, job lighting and power, insurance, safety protection, security and hoists) in whole or in part apportionable to Tenant's Overstandard Work. If the aggregate of all Tenant's Overstandard Work to which Landlord agrees is less than $2,000.00, the whole amount shall be payable promptly after completion of such work and after Landlord's billing Tenant for the work. If the aggregate of all Tenant's Overstandard Work exceeds $2,000.00, such aggregate shall be payable 50% upon Tenant's signing with Landlord the agreement under which Landlord agrees to perform such Tenant's Overstandard Work, and the balance shall be payable in substantially equal progress payments promptly after Landlord's billing Tenant for that work. Such payments in either event shall be collectible as additional obligations which Tenant shall bear pursuant to the Lease, and, if Tenant defaults in the payment of that work, Landlord shall have (in addition to all other remedies) the same rights as provided in the Lease in the event of Tenants' default in the payment of rent. Any Tenant's Overstandard Work shall also be subject to the terms of the Lease and shall also be subject to Landlord's approval of plans and specifications as set forth in Paragraph 1 above. 5. If the Expansion Premises are not ready for occupancy because of delays attributable to Tenant (such as changes by Tenant to its finish requirements after approval of the initial design, delays in providing information or approving space plans and drawings, and like delays, but not including the architect's reasonable rejection of the Work under Paragraph 1 above) the Expansion Premises Commencement Date shall be the date the Expansion Premises would have been substantially completed and ready for occupancy in the absence of such delays, which date is agreed to be May 1, 2000. Failure by Landlord to complete the tenant finish improvements shall not relieve Tenant of its duty to pay rent and perform its obligations under the Lease if such failure is attributable to Tenant's failure to determine its requirements, approve plans and specifications or otherwise facilitate completion of the tenant finish improvements. However, if the Expansion Premises are not ready for occupancy because of delays not attributable to Tenant, Force Majeure, or architect's reasonable rejection of the Work pursuant to Paragraph 1 above, the Expansion Premises Commencement Date shall be the first day of the month following the date the Work is substantially complete and the Expansion Premises are substantially ready for occupancy. In the event the Expansion Premises Commencement Date is delayed beyond May 1, 2000, the Termination Date of the Lease for the Premises and Expansion Premises shall be extended to the date which is the last day of the month that is seventy-two (72) full months after the Expansion Premises Commencement Date, and the parties shall enter into an amendment to the Lease verifying the Expansion Premises Commencement Date and the Termination Date of the Lease. 9 10 6. The terms "substantially complete" and "substantial completion" are defined as the date when construction is sufficiently completed in accordance with the contract documents, as modified by any change orders agreed to by the parties, and subject to completion of Tenant's reasonable list of punch-list items, so that Tenant can occupy the Expansion Premises for the use for which it was intended. 10 EX-10.24 5 BANK ONE MASTER LEASE AGREEMENT 1 EXHIBIT 10.24 [BANK ONE LOGO] MASTER LEASE AGREEMENT Dated As Of: _____________ This MASTER LEASE AGREEMENT is made and entered into by and between BANC ONE LEASING CORPORATION ("Lessor"), and Ohio corporation, with its principal place of business at 1111 Polaris Parkway, Columbus, Ohio 43240 and the Lessee identified below: LESSEE NAME: THE TRIZETTO GROUP, INC. LESSEE ADDRESS: 569 SAN NICOLAS DRIVE SUITE 360 NEWPORT BEACH, CA 92660 1. LEASE OF EQUIPMENT: Lessor leases to Lessee, and Lessee leases from Lessor, all the property described in the Lease Schedules which are signed from time to time by Lessor and Lessee. 2. CERTAIN DEFINITIONS: "Schedule" means each Lease Schedule signed by Lessee and Lessor which incorporates the terms of this Master Lease Agreement, together with all exhibits, riders, attachments and addenda thereto. "Equipment" means the property in each Schedule, together with all attachments, additions, accessions, parts, repairs, improvements, replacements and substitutions thereto. "Lease", "herein", "hereunder", "hereof" and similar words mean this Master Lease Agreement and all Schedules, together with all exhibits, riders, attachments and addenda to any of the foregoing, as the same may from time to time be amended, modified or supplemented. "Prime Rate" means the prime rate of interest announced from time to time as the prime rate by Bank One, Columbus, NA; provided, that the parties acknowledge that the Prime Rate is not intended to be the lowest rate of interest charged by said bank in connection with extensions of credit. "Lien" means any security interest, lien, mortgage, pledge, encumbrance, judgment, execution, attachment, warrant, writ, levy, other judicial process or claim of any nature whatsoever by or of any person. "Fair Market Value" means the amount which would be paid for an item of Equipment by an informed and will buyer (other than a used equipment or scrap dealer) and an informed and willing seller neither under a compulsion to buy or sell. "Lessor's Cost" means the invoiced price of any item of Equipment plus any other cost to Lessor of acquiring an item of Equipment. All terms defined in the Lease are equally applicable to both the singular and plural form of such terms. 3. LEASE TERM AND RENT: The term of the lease of the Equipment described in each Schedule ("Lease Term") commences on the date stated in the Schedule and continues for the term stated therein. As rent for the Equipment described in each Schedule, Lessee shall pay Lessor the rent payments and all other amounts stated in such Schedule, payable on the dates specified therein. All payments due under the Lease shall be made in United States dollars at Lessor's office stated in the opening paragraph or as otherwise directed by Lessor in writing. 4. ORDERING, DELIVERY, REMOVAL AND INSPECTION OF EQUIPMENT: If an event of default occurs or if for any reason Lessee does not accept, or revokes its acceptance of, equipment covered by a purchase order or purchase contract or if any commitment or agreement of Lessor to lease equipment to Lessee expires, terminates or is otherwise canceled, then automatically upon notice from Lessor, any purchase order or purchase contract and all obligations thereunder shall be assigned to Lessee and Lessee shall pay and perform all obligations thereunder. Lessee agrees to pay, defend, indemnify and hold Lessor harmless from any liabilities, obligations, claims, costs and expenses (including reasonable attorney fees and expenses) of whatever kind imposed on or asserted against Lessor in any way related to any purchase orders or purchase contracts. Lessee shall make all arrangements for, and Lessee shall pay all costs of, transportation, delivery, installation and testing of Equipment. The Equipment shall be delivered to Lessee's premises stated in the applicable Schedule and shall not be removed without Lessor's prior written consent. Lessor has the right upon reasonable notice to Lessee to inspect the Equipment wherever located. Lessor may enter upon any premises where Equipment is located and remove it immediately, without notice or liability to Lessee, upon the expiration or other termination of the Lease Term. 5. MAINTENANCE AND USE: Lessee agrees it will, at its sole expense: (a) repair and maintain the Equipment in good condition and working order and supply and install all replacement parts or other devices when required to so maintain the Equipment or when required by applicable law or regulation, which parts or devices shall automatically become part of the Equipment; (b) use and operate in a careful manner in the normal course of its business and only for the purposes for which it was designed in accordance with the manufacturer's warranty requirements, and comply with all laws and regulations relating to the Equipment, and obtain all permits or licenses necessary to install, use or operate the Equipment; and (c) make no alterations, additions, subtractions, upgrades or improvements to the Equipment without Lessor's prior written consent, but any such alterations, additions, upgrades or improvements shall automatically become part of the Equipment. The Equipment will not be used or located outside of the United States. 6. NET LEASE; NO EARLY TERMINATION: The Lease is a net lease. Lessee's obligation to pay all rent and all other amounts payable under the Lease is absolute and unconditional under any and all circumstances and shall not be affected by any circumstance or any character including, without limitation, (a) any setoff, claim, counterclaim, defense or reduction which Lessee may have at any time against Lessor or any other party for any reason, or (b) any defect in the condition, design or operation of, any lack of fitness for use of, any damage to or loss of, or any lack of maintenance or service for any of the Equipment. Each Schedule is a noncancelable lease of the Equipment described therein and Lessee's obligation to pay rent and perform all other obligations thereunder and under the Lease are not subject to cancellation or termination by Lessee for any reason. Page 1 of 6 2 [BANK ONE LOGO] 7. NO WARRANTIES BY LESSOR: LESSOR LEASES THE EQUIPMENT AS-IS, WHERE-IS, AND WITH ALL FAULTS. LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, OF ANY KIND AS TO THE EQUIPMENT INCLUDING, WITHOUT LIMITATION: ITS MERCHANTABILITY; ITS FITNESS FOR ANY PARTICULAR PURPOSE; ITS DESIGN, CONDITION, QUALITY, CAPACITY, DURABILITY, CAPABILITY, SUITABILITY OR WORKMANSHIP; ITS NON-INTERFERENCE WITH OR NON-INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHT; OR ITS COMPLIANCE WITH ANY LAW, RULE, SPECIFICATION, PURCHASE ORDER OR CONTRACT PERTAINING THERETO. Lessor hereby assigns to Lessee the benefit of any assignable manufacturer's or supplier's warranties, but Lessor, at Lessee's written request, will cooperate with Lessee in pursuing any remedies Lessee may have under such warranties. Any action taken with regard to warranty claims against any manufacturer or supplier by Lessee will be at Lessee's sole expense. LESSOR MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OF ANY KIND AS TO THE FINANCIAL CONDITION OR FINANCIAL STATEMENTS OF ANY PARTY OR AS TO THE TAX OR ACCOUNTING TREATMENT OR CONSEQUENCES OF THE LEASE, THE EQUIPMENT OR THE RENTAL PAYMENTS. 8. INSURANCE: Lessee at its sole expense shall at all times keep each item of Equipment insured against all risks of loss or damage from every cause whatsoever for an amount not less than the greater of the full replacement value or the Lessor's Cost of such item of Equipment. Lessee at its sole expense shall at all times carry public liability and property damage insurance in amounts satisfactory to Lessor protecting Lessee and Lessor from liabilities for injuries to persons and damage to property of others relating in any way to the Equipment. All insurers shall be reasonably satisfactory to Lessor. Lessee shall deliver to Lessor satisfactory evidence of such coverage. Proceeds of any insurance covering damage or loss of the Equipment shall be payable to Lessor as loss payee and shall, at Lessor's option, be applied toward (a) the replacement, restoration or repair of the Equipment, or (b) payment of the obligations of Lessee under the Lease. Proceeds of any public liability or property insurance shall be payable first to Lessor as additional insured to the extent of its liability, then to Lessee. If an event of default occurs and is continuing, or if Lessee fails to make timely payments due under Section 9 hereof, then Lessee automatically appoints Lessor as Lessee's attorney-in-fact with full power and authority in the place of Lessee and in the name of Lessee or Lessor to make claim for, receive payment of, and sign and endorse all documents, checks or drafts for loss or damage under any such policy. Each insurance policy will require that the insurer give Lessor at least 30 days prior written notice of any cancellation of such policy and will require that Lessor's interests remain insured regardless of any act, error, omission, neglect or misrepresentation of Lessee. The insurance maintained by Lessee shall be primary without any right of contribution from insurance which may be maintained by Lessor. 9. LOSS AND DAMAGE: (a) Lessee bears the entire risk of loss, theft, damage or destruction of Equipment in whole or in part from any reason whatsoever ("Casualty Loss"). No Casualty Loss to Equipment shall relieve Lessee from the obligation to pay rent or from any other obligation under the Lease. In the event of Casualty Loss to any item of Equipment, Lessee shall immediately notify Lessor of the same and Lessee shall, if so directed by Lessor, immediately repair the same. If Lessor determines that any item of Equipment has suffered a Casualty Loss beyond repair ("Lost Equipment"), then Lessee, at the option of Lessor, shall: (1) immediately replace the Lost Equipment with similar equipment in good repair, condition and working order free and clear of any Liens and deliver to Lessor a bill of sale covering the replacement equipment, in which event such replacement equipment shall automatically be Equipment under the Lease; or (2) On the rent payment date which is at least 30 but not more than 60 days after the date of the Casualty Loss, pay to Lessor all amounts then due and payable by Lessee under the Lease for the Lost Equipment plus the Stipulated Loss Value for such Lost Equipment as of the date of the Casualty Loss. Upon payment by Lessee of all amounts due under the above clause (2), the lease of the Lost Equipment will terminate and Lessor shall transfer to Lessee all of Lessor's right, title and interest in such Equipment on "as-is, where-is" basis with all faults, without recourse and without representation or warranty of any kind, express or implied. (b) "Stipulated Loss Value" of any item of Equipment during its Lease Term equals the present value discounted in arrears to the applicable date at the applicable SLV Discount Rate of (1) the remaining rents and all other amounts [including, without limitation, any balloon payment and, as to a terminal rental adjustment clause ("TRAC") lease, the TRAC value stated in the Schedule, and any other payments required to be paid by Lessee at the end of the applicable Lease Term] payable under the Lease for such item on and after such date to the end of the applicable Lease Term and (2) an amount equal to the Economic Value of the Equipment. For any item of Equipment, "Economic Value" means the Fair Market Value of the Equipment at the end of the applicable Lease Term as originally anticipated by Lessor at the Commencement Date of the applicable Schedule; provided, that Lessee agrees that such value shall be determined by the books of Lessor as of the Commencement Date of the applicable Schedule. After the payment of all rent due under the applicable Schedule and the expiration of the Lease Term of any item of Equipment, the Stipulated Loss Value of such item equals the Economic Value of such item. Stipulated Loss Value shall also include any Taxes payable by Lessor in connection with its receipt thereof. For any item of Equipment, "SLV Discount Rate" means an interest rate equal to the Prime Rate in effect on the Commencement Date of the Schedule for such item minus two percentage points. 10. TAX BENEFITS INDEMNITY. (a) The Lease has been entered into on the basis that Lessor shall be entitled to such deductions, credits and other tax benefits as are provided by federal, state and local income tax law to an owner of the Equipment (the "Tax Benefits") including, without limitation: (1) modified accelerated cost recovery deductions on each item of Equipment under Section 168 of the Code (as defined below) in an amount determined commencing with the taxable year in which the Commencement Date of the applicable Schedule occurs, using the maximum allowable depreciation method available under Section 168 of the Code, using a recovery period (as defined in Section 168 of the Code) reasonably determined by Lessor, and using an initial adjusted basis which is equal to the Lessor's Cost of such item; (2) amortization of the expenses paid by Lessor in connection with the Lease on a straight-line basis over the term of the applicable Schedule; and (3) Lessor's federal taxable income will be subject to the maximum rate on corporations in effect under the Code as of the Commencement Date of the applicable Schedule. (b) If on any one or more occasions (1) Lessor shall lose, shall not have or shall lose the right to claim all or any part of the Tax Benefits, (2) there shall be reduced, disallowed, recalculated or recaptured all or any part of the Tax Benefits, or (3) all or any part of the Tax Benefits is reduced by a change in law or regulation (each of the events described in subparagraphs 1, 2, or 3 of this paragraph (b) will be referred to as a "Tax Loss"), then upon 30 days written notice by Lessor to Lessee that a Tax Loss has occurred, Lessee shall pay Lessor an amount which, in the reasonable opinion of Lessor and after the deduction of all taxes required to be paid by Lessor with respect to the receipt of such amount, will provide Lessor with the same after-tax net economic yield which was originally anticipated by Lessor as of the Commencement Date of the applicable Schedule. (c) A Tax Loss shall occur upon the earliest of: (1) the happening of any event (such as disposition or change in use of an item of Equipment) which may cause such Tax Loss; (2) Lessor's payment to the applicable taxing authority of the tax increase resulting from such Tax Loss; or (3) the adjustment of Lessor's tax return to reflect such Tax Loss. (d) Lessor shall not be entitled to payment under this section for any Tax Loss caused solely by one or more of the following events: (1) a disqualifying sale or disposition of an item of Equipment by Lessor prior to any default by Lessee; (2) Lessor's failure to timely or properly claim the Tax Benefits in Lessor's tax return; (3) a disqualifying change in the nature of Lessor's business or liquidation thereof; (4) a foreclosure by any person holding through Lessor a security interest on an item of Equipment which foreclosure results solely from an act of Lessor; or (5) Lessor's failure to have sufficient taxable income or tax liability to utilize the Tax Benefits. Page 2 of 6 3 [BANK ONE LOGO] (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. For the purposes of this section 10, the term "Lessor" shall include any affiliate group (within the meaning of section 1504 of the Code) of which Lessor is a member for any year in which a consolidated income tax return is filed for such affiliated group. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 11. GENERAL TAX INDEMNITY: Lessee will pay, and will defend, indemnify and hold Lessor harmless on an after-tax basis from, any and all Taxes (as defined below) and related audit and contest expenses on or relating to (a) any of the Equipment, (b) the Lease, (c) purchase, acceptance, ownership, lease, possession, use, operation, transportation, return or other disposition of any of the Equipment, and (d) rentals or earnings relating to any of the Equipment or the Lease. "Taxes" means present and future taxes or other governmental charges that are not based on the net income of Lessor, whether they are assessed to or payable by Lessee or Lessor, including, without limitation (i) sales, use, excise, licensing, registration, titling, franchise, business and occupation, gross receipts, stamp and personal property taxes, (ii) levies, imposts, duties, assessments, charges and withholdings, (iii) penalties, fines, and additions to tax and (iv) interest on any of the foregoing. Unless Lessor elects otherwise, Lessor will prepare and file all reports and returns relating to any Taxes and will pay all Taxes to the appropriate taxing authority. Lessee will reimburse Lessor for all such payments promptly on request. On or after any applicable assessments/levy/lien date for any personal property Taxes relating to any Equipment, Lessee agrees that upon Lessor's request Lessee shall pay to Lessor the personal property Taxes which Lessor reasonably anticipates will be due, assessed, levied or otherwise imposed on any Equipment during its Lease Term. If Lessor elects in writing, Lessee will itself prepare and file all such reports and returns, pay all such Taxes directly to the taxing authority, and send Lessor evidence thereof. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 12. GENERAL INDEMNITY: Lessee assumes all risk and liability for, and shall defend, indemnify and keep Lessor harmless on an after-tax basis from, any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs and expenses, including reasonable attorney fees and expenses, of whatsoever kind and nature imposed on, incurred by or asserted against Lessor, in any way relating to or arising out of the manufacture, purchase, acceptance, rejection, ownership, possession, use, selection, delivery, lease, operation, condition, sale, return or other disposition of the Equipment or any part thereof (including, without limitation, any claim for latent or other defects, whether or not discoverable by Lessee or any other person, any claim for negligence, tort or strict liability, any claim under any environmental protection or hazardous waste law and any claim for patent, trademark or copyright infringement). Lessee will not indemnify Lessor under this section for loss or liability arising from events which occur after the Equipment has been returned to Lessor or for loss or liability caused directly and solely by the gross negligence or willful misconduct of Lessor. In this section, "Lessor" also includes any director, officer, employee, agent, successor or assign of Lessor. Lessor's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 13. PERSONAL PROPERTY: Lessee represents and agrees that the Equipment is, and shall at all times remain, separately identifiable personal property. Upon Lessor's request, Lessee shall furnish Lessor a landlord's and/or mortgagee's waiver and consent to remove all Equipment. Lessor may display notice of its interest in the Equipment by any reasonable identification. Lessee shall not alter or deface any such indicia of Lessor's interest. 14. DEFAULT: Each of the following events shall constitute an event of default under the Lease: (a) Lessee fails to pay any rent or other amount due under the Lease within ten days of its due date; or (b) Lessee fails to perform or observe any of its obligations in Sections 8, 18, or 22 hereof; or (c) Lessee fails to perform or observe any of its other obligations in the Lease for more than 30 days after Lessor notifies Lessee of such failure; or (d) Lessee or any Lessee affiliate defaults in the payment, performance or observance of any obligation under any loan, credit agreement or other lease in which Lessor or any subsidiary (direct or indirect) of Bank One Corporation (which is Lessor's ultimate parent corporation) is the creditor or Lessor, or (e) any statement, representation or warranty made by Lessee in the Lease, in any Schedule or in any document, certificate or financial statement in connection with the Lease proves at any time to have been untrue or misleading in any material respect as of the time when made; or (f) Lessee becomes insolvent or bankrupt, or Lessee admits its inability to pay its debts as they mature, or Lessee makes an assignment for the benefit of creditors, or Lessee applies for, institutes or consents to the appointment of a receiver, trustee or similar official for Lessee or any substantial part of its property or any such official is appointed without Lessee's consent, or Lessee applies for, institutes or consents to any bankruptcy, insolvency, reorganization, debt moratorium, liquidation or similar proceeding relating to Lessee or any substantial part of its property under the laws of any jurisdiction or any such proceeding is instituted against Lessee without stay or dismissal for more than 30 days, or Lessee commences any act amounting to a business failure or a winding up of its affairs, or Lessee ceases to do business as a going concern; or (g) with respect to any guaranty, letter of credit, pledge agreement, security agreement, mortgage, deed of trust, debt subordination agreement or other credit enhancement or credit support agreement (whether now existing or hereafter arising) signed or issued by any party in connection with all or any part of Lessee's obligations under the Lease, the party signing or issuing any such agreement defaults in its obligations thereunder or any such agreement shall cease to be in full force and effect or shall be declared to be null, void, invalid or unenforceable by the party signing or issuing it; or (h) there shall occur in Lessor's reasonable opinion any material adverse change in the financial condition, business or operations of Lessee. As used in this section 14, the term "Lessee" also includes any guarantor (whether now existing or hereafter arising) of all or any part of Lessee's obligations under the Lease and/or any issuer of a letter of credit (whether now existing or hereafter arising) relating to all or any part of Lessee's obligations under the Lease, and the term "Lease" also includes any guaranty or letter of credit (whether now existing or hereafter arising) relating to all or any part of Lessee's obligations under the Lease. 15. REMEDIES. If any event of default exists, Lessor may exercise in any order one or more of the remedies described in the lettered subparagraphs of this section, and Lessee shall perform its obligations imposed thereby; (a) Lessor may require Lessee to return any or all Equipment as provided in the Lease. (b) Lessor or its agent may repossess any or all Equipment wherever found, may enter the premises where the Equipment is located and disconnect, render unusable and remove it, and may use such premises without charge to store or show the Equipment for sale. (c) Lessor may sell any or all Equipment at public or private sale, with or without advertisement or publication, may re-lease or otherwise dispose of it or may use, hold or keep it. (d) Lessor may require Lessee to pay to Lessor on a date specified by Lessor, with respect to any or all Equipment (i) all accrued and unpaid rent, late charges and other amounts due under the Lease on or before such date, plus (ii) as liquidated damages for loss of a bargain and not as a penalty, and in lieu of any further payments of rent, the Stipulated Loss Value of the Equipment on such date, plus (iii) interest at the Overdue Rate on the total of the foregoing ("Overdue Rate" means an interest rate per annum equal to the higher of 18% or 2% over the Prime Rate, but not to exceed the highest rate permitted by applicable law). The parties acknowledge that the foregoing money damage calculation reasonably reflects Lessor's anticipated loss with respect to the Equipment and the related Lease resulting from the event of default. If an event of default under section 14 (f) of this Master Lease Agreement exists, then Lessee will be automatically liable to pay Lessor the foregoing amounts as of the next payment date unless Lessor otherwise elects in writing. Page 3 of 6 4 (e) Lessee shall pay all costs, expenses and damages incurred by Lessor because of the event of default or its actions under this section, including, without limitation any collection agency and/or attorney fees and expenses, any costs related to the repossession, safekeeping, storage, repair, reconditioning or disposition of the Equipment and any incidental and consequential damages. (f) Lessor may terminate the Lease and/or any or all Schedules, may sue to enforce Lessee's performance of its obligations under the Lease and/or may exercise any other right or remedy then available to Lessor at law or in equity. Lessor is not required to take any legal process or give Lessee any notice before exercising any of the above remedies. None of the above remedies is exclusive, but each is cumulative and in addition to any other remedy available to Lessor. Lessor's exercise of one or more remedies shall not preclude its exercise of any other remedy. No action taken by Lessor shall release Lessee from any of its obligations to Lessor. No delay or failure on the part of Lessor to exercise any right hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise of any right preclude any other exercise thereof or the exercise of any other right. After any default, Lessor's acceptance of any payment by Lessee under the Lease shall not constitute a waiver by Lessor of such default, regardless of Lessor's knowledge or lack of knowledge at the time of such payment, and shall not constitute a reinstatement of the Lease if the Lease has been declared in default by Lessor, unless Lessor has agreed in writing to reinstate the Lease and to waive the default. If Lessor actually repossesses any Equipment, then it will use commercially reasonable efforts under the then current circumstances to attempt to mitigate its damages, provided, that Lessor shall not be required to sell, release or otherwise dispose of any Equipment prior to Lessor enforcing any of the remedies described above. Lessor may sell or release the Equipment in any manner it chooses, free and clear of any claims or rights of Lessee and without any duty to account to Lessee with respect thereto except as provided below. If Lessor actually sells or releases the Equipment, it will credit the net proceeds of any sale of the Equipment, or the net present value (discounted at the then current Prime Rate) of the rents payable under any new lease of the Equipment, against and up to (but not exceeding) the Stipulated Loss Value of the Equipment and any other amounts Lessee owes Lessor, or will reimburse Lessee for and up to (but not exceeding) Lessee's payment thereof. The term "net" as used above shall mean such amount after deducting the costs and expenses described in clause(3) above of this section. If lessor elects in writing not to sell or release any Equipment, it will similarly credit or reimburse Lessee for Lessor's reasonable estimate of such Equipment's Fair Market Value. 16. LESSOR'S RIGHT TO PERFORM: If Lessee fails to make any payment under the Lease or fails to perform any of its agreements in the Lease (including, without limitation, its agreement to provide insurance coverage as stated in the Lease), Lessor may itself make such payment or perform such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or performance shall be deemed to be additional rent, payable by Lessee on demand. 17. FINANCIAL REPORTS: Lessee agrees to furnish to Lessor, (a) annual financial statements setting forth the financial condition and results of operation of Lessee (financial statements shall include balance sheet, income statement and changes in financial position and all notes thereto) within 120 days of the end of each fiscal year of Lessee; (b) quarterly financial statements setting forth the financial condition and results of operation of Lessee within 60 days of the each of the first three fiscal quarters of Lessee; and (c) such other financial information as Lessor may from time to time reasonably request including, without limitation, financial reports filed by Lessee with federal or state regulatory agencies. All such financial information shall be prepared in accordance with generally accepted accounting principles. If Lessee fails to furnish the annual financial statements to Lessor within 30 days of Lessor's written request, then Lessor may, at its option, charge Lessee a non-performance fee equal to all the rentals due under the Lease for the current month (unless otherwise prohibited by law) and such fees shall be deemed to be additional rent, payable by Lessee on demand. 18. NO CHANGE IN LESSEE: Lessee shall not; (a) liquidate, dissolve or suspend business; (b) sell, transfer or otherwise dispose of all or a majority of its assets, except that Lessee may sell its inventory in the ordinary course of its business; (c) enter into any merger, consolidation or similar reorganization unless it is the surviving corporation; (d) transfer all or any substantial part of its operations or assets outside of the United States of America; or (e) without 30 days advance written notice to Lessor, change its name or chief place of business. Lessee shall at all times maintain a tangible net worth which is no less than the greater of 75% of its tangible net worth as of the date of the Master Lease Agreement or 75% of its highest tangible net worth thereafter. 19. LATE CHARGES: If any rent or other amount payable under the Lease is not paid when due, then as compensation for the administration and enforcement of Lessee's obligation to make timely payments, Lessee shall pay with respect to each overdue payment on demand an amount equal to the greater of fifteen dollars ($15.00) or five percent (5%) of the each overdue payment (but not to exceed the highest late charge permitted by applicable law) plus any collection agency fees and expenses. 20. NOTICES; POWER OF ATTORNEY: (a) Service of all notices under the Lease shall be sufficient if given personally or couriered or mailed to the party involved at its respective address set forth herein or at such other address as such party may provide in writing from time to time. Any such notice mailed to such address shall be effective three days after deposit in the United States mail with postage prepaid, (b) With respect to any power of attorney covered by the Lease, the powers conferred on Lessor thereby; are powers coupled with an interest; are irrevocable; are solely to protect Lessor's interests under the Lease; and do not impose any duty on Lessor to exercise such power. Lessor shall be accountable solely for amounts it actually receives as a result of its exercise of such powers. 21. ASSIGNMENT BY LESSOR: Lessor and any assignee of Lessor, with or without notice to or consent of Lessee, may sell, assign, transfer or grant a security interest in all or any part of Lessor's rights, obligations, title or interest in the Equipment, the Lease, any Schedule or the amounts payable under the Lease or any Schedule to any entity ("transferee"). The transferee shall succeed to all of Lessor's rights in respect to the Lessee (including, without limitation, all rights to insurance and indemnity protection described in the Lease). Lessee agrees to sign any acknowledgment and other documents reasonably requested by Lessor or the transferee in connection with any such transfer transaction. Lessee, upon receiving notice of any such transfer transactions, shall comply with the terms and conditions thereof. Lessee agrees that it shall not assert against any transferee any claim, defense, setoff, deduction or counterclaim which Lessee may now or hereafter be entitled to assert against Lessor. Unless otherwise agreed in writing, the transfer transaction shall not relieve Lessor of any of its obligations to Lessee under the Lease and Lessee agrees that the transfer transaction shall not be construed as being an assumption of such obligations by the transferee. 22. NO ASSIGNMENT, SUBLEASE OR LIEN BY LESSEE: LESSEE SHALL NOT, DIRECTLY OR INDIRECTLY, (a) MORTGAGE, ASSIGN, SELL, TRANSFER, OR OTHERWISE DISPOSE OF THE LEASE OR ANY INTEREST THEREIN OR THE EQUIPMENT OR ANY PART THEREOF, OR (b) SUBLEASE, RENT, LEND OR TRANSFER POSSESSION OR USE OF THE EQUIPMENT OR ANY PART THEREOF TO ANY PARTY, OR (c) CREATE, INCUR, GRANT, ASSUME OR ALLOW TO EXIST ANY LIEN ON THE LEASE, ANY SCHEDULE, THE EQUIPMENT OR ANY PART THEREOF. Page 4 of 6 5 [BANK 1 ONE. LOGO] 23. EXPIRATION OF LEASE TERM: (a) At least 90 days (or earlier if otherwise specified), but no more than 270 days prior to expiration of the Lease Term of each Schedule, Lessee shall give Lessor written notice of its electing one of the following options for all (but not less than all) of the Equipment covered by such Schedule: return the Equipment under clause (b) below; or purchase the Equipment under clause (c) below. The election of an option shall be irrevocable. If Lessee fails to give timely notice of its election, it shall be deemed to have elected to return the Equipment. (b) If Lessee elects or is deemed to have elected to return the Equipment at the expiration of the Lease Term of a Schedule or if Lessee is obligated at any time to return the Equipment, then Lessee shall, at its sole expense and risk, deinstall, disassemble, pack, crate, insure and return the Equipment to Lessor (all in accordance with applicable industry standards) at any location in the continental United States of America selected by Lessor. The Equipment shall be in the same condition as when received by Lessee, reasonable wear, tear and depreciation resulting from normal and proper use excepted (or, if applicable, in the condition set forth in the Lease or the Schedule), shall be in good operating order and maintenance as required by the Lease, shall be certified as being eligible for any available manufacturer's maintenance program, shall be free and clear of any Liens as required by the Lease, shall comply with all applicable laws and regulations and shall include all manuals, specifications, repair and maintenance records and similar documents. Until Equipment is returned as required above, all terms of the Lease shall remain in full force and effect including, without limitation, obligations to pay rent and insure the Equipment; provided, that after the expiration of any Schedule and before Lessee has completed its return of the Equipment or its purchase option (if elected), the term of the lease of the Equipment covered by such Schedule shall be month-to-month or such shorter period as may be specified by Lessor. (c) If Lessee gives Lessor timely notice of its election to purchase Equipment, then on the expiration date of the applicable Schedule Lessee shall purchase all (but not less than all) of the Equipment and shall pay to Lessor the Fair Market Value of the Equipment plus all Taxes (other than income taxes on Lessor's gains on such sale), costs and expenses incurred or paid by Lessor in connection with such sale plus all accrued but unpaid amounts due with respect to the Equipment and/or the Schedule. The Stipulated Loss Value or Economic Value of any item of Equipment shall have no bearing or influence on the determination of Fair Market Value under this clause (c). Upon payment in full of the above amounts, and if no default has occurred and is continuing under the Lease, Lessor shall transfer title to such Equipment to Lessee "as-is, where-is" with all faults and without recourse to Lessor and without any representation or warranty of any kind whatsoever by Lessor, express or implied. (d) For purposes of the purchase option of the Lease, the determination of the Fair Market Value of any Equipment shall be determined (1) without deducting any costs of dismantling or removal from the location of use, (2) on the assumption that the Equipment is in the condition required by the applicable return and maintenance provisions of the Lease and is free and clear of any Liens as required by the Lease, and (3) shall be determined by mutual agreement of Lessee and Lessor or; if Lessor and Lessee are not able to agree on such value, by the Appraisal Procedure. "Appraisal Procedure" means the determination of Fair Market Value by an independent appraiser acceptable to Lessor and Lessee, or, if the parties are unable to agree on an acceptable appraiser, by averaging the valuation (disregarding the one which differs the most from the other two) of three independent appraisers, the first appointed by Lessor, the second appointed by Lessee and the third appointed by the first two appraisers. For purposes of the "Remedies" section of the Lease, the Fair Market Value shall be determined by Lessor in good faith and any such valuation shall be on an "as-is, where is" basis without regard to the first sentence of clause (d). Lessee, at its sole expense, shall pay all fees, costs and expenses of the above described appraisers. 24. GOVERNING LAW: THE INTERPRETATION, CONSTRUCTION AND VALIDITY OF THE LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OHIO. WITH RESPECT TO ANY ACTION BROUGHT BY LESSOR AGAINST LESSEE TO ENFORCE ANY TERM OF THE LEASE, LESSEE HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT IN THE FRANKLIN COUNTY, OHIO, WHERE LESSOR HAS ITS PRINCIPAL PLACE OF BUSINESS AND WHERE PAYMENTS ARE TO BE MADE BY LESSEE. 25. MISCELLANEOUS: (a) Subject to the limitations herein, the Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, administrators, successors and assigns. (b) This Master Lease Agreement and each Schedule may be executed in any number of counterparts, which together shall constitute a single instrument. Only one counterpart of each Schedule shall be marked "Lessor's Original" and all other counterparts shall be marked "Duplicate". A security interest in any Schedule may be created through transfer and possession only of the counterpart marked "Lessor's Original". (c) Section and paragraph headings in this Master Lease Agreement and the Schedules are for convenience only and have no independent meaning. (d) The terms of the Lease shall be severable and if any term thereof is declared unconscionable, invalid, illegal or void, in whole or in part, the decision so holding shall not be construed as impairing the other terms of the Lease and the Lease shall continue in full force and effect as if such invalid, illegal, void or unconscionable term were not originally included herein. (e) All indemnity obligations of Lessee under the Lease and all rights, benefits and protections provided to Lessor by warranty disclaimers shall survive the cancellation, expiration or termination of the Lease. (f) Lessor shall not be liable to Lessee for any indirect, consequential or special damages for any reason whatsoever. (g) Each payment made by Lessee shall be applied by Lessor in such manner as Lessor determines in its discretion which may include, without limitation, application as follows: first, to accrued late charges; second, to accrued rent; and third, the balance to any other amounts then due and payable by Lessee under the Lease. (h) If the Lease is signed by more than one Lessee, each of such Lessees shall be jointly and severally liable for payment and performance of all of Lessee's obligations under the Lease. 26. ENTIRE AGREEMENT: THE LEASE REPRESENTS THE FINAL, COMPLETE AND ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO. THERE ARE NO ORAL OR UNWRITTEN AGREEMENTS OR UNDERSTANDINGS AFFECTING THE LEASE OR THE EQUIPMENT. Lessee agrees that Lessor is not the agent of any manufacturer or supplier, that no manufacturer or supplier is an agent of Lessor, and that any representation, warranty or agreement made by manufacturer, supplier or by their employees, sales representatives or agents shall not be binding on Lessor. Page 5 of 6 6 [BANK 1 ONE. LOGO] 27. JURY WAIVER: ALL PARTIES TO THIS MASTER LEASE AGREEMENT WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY ON ANY MATTER WHATSOEVER ARISING OUT OF, IN CONNECTION WITH OR IN ANY WAY RELATED TO THIS MASTER LEASE AGREEMENT. IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Master Lease Agreement as of the date first written above. BANC ONE LEASING CORPORATION THE TRIZETTO GROUP, INC. Lessor (Name of Lessee) By: By: /s/ M.J. SUNDERLAND ----------------------------- ----------------------------- Title: Title: SR VP, CFO -------------------------- -------------------------- Lessee's Witness: --------------- Regardless of any prior, present or future oral agreement or course of dealing, no term or condition of the lease may be amended, modified, waived, discharged, cancelled or terminated except by a written instrument signed by the party to be bound; except Lessee authorizes Lessor to complete the Acceptance Date of each schedule and the serial numbers of any equipment. THE TRIZETTO GROUP, INC. (Name of Lessee) By: /s/ M.J. SUNDERLAND ----------------------------- Title: SR VP, CFO -------------------------- Page 6 of 6 7 [BANK 1 ONE LOGO] SECURITY AGREEMENT This Agreement is made as of ____________ by and between BANC ONE LEASING CORPORATION ("Banc One Leasing"), with Banc One Leasing's mailing address being at 1111 Polaris Parkway, Suite A3 (OH1-1085), Columbus, Ohio 43240 and Debtor(s) identified below (individually and collectively, the "Debtor"). Debtor means: THE TRIZETTO GROUP, INC. Lease/Loan Customer: THE TRIZETTO GROUP, INC. 1. Grant of Security Interest. For valuable consideration, receipt of which is hereby acknowledged, Debtor grants, pledges and assigns to Banc One Leasing a security interest in all of Debtor's respective right, title and interest, purchase money as appropriate, in and to the property described below, now or hereafter arising or acquired, wherever located, together with any and all additions, accessions, parts, accessories, substitutions and replacements thereof, now or hereafter installed in, affixed to or used in connection with said property, in all products and proceeds thereof, cash and non-cash, including, but not limited to, proceeds of notes, checks, instruments, indemnity proceeds, or any insurance on such and any refund or rebate of premiums on such, and all books, records, ledger cards, files, correspondence, computer program, tapes, disks and related data processing software, owned by Debtor or in which it has an interest that at any time evidences or contains information relating thereto or is otherwise necessary or helpful in the collection thereof or realization thereupon ("Collateral"), to secure the prompt payment and complete performance of the Obligations (as hereinafter defined); provided, however, that the Collateral shall not include any Hazardous Materials (as hereinafter defined), except for any Hazardous Materials (a) which are and/or hereafter will be handled, stored and contained in accordance with all applicable Hazardous Materials Laws (as hereinafter defined) and (b) which either (i) are and/or will be hereafter used or useful in the ordinary course of business of Debtor or (ii) have a resale or salvage value which exceeds the cost of disposing of each Hazardous Materials. The Collateral in which this security interest is granted is all of the Debtor's property described in EXHIBIT A attached hereto (and such terms as are used in Exhibit A shall be used in their broader definitions and shall include, without limitation, the definitions of such terms as are found in the Uniform Commercial Code that governs security interests in any such property). 2. Secured Obligations. This Agreement secures the full and prompt performance of all obligations which any Lease/Loan Customer identified above (hereinafter individually and collectively called "Customer") and/or any Debtor now have or may hereafter have to Banc One Leasing, including, but not limited to, obligations under equipment leases, promissory notes, loan agreements and guaranties executed in connection with equipment leases, promissory notes or loan agreements (including but not limited to all present and future leases, promissory notes, loan agreements and guaranties), and secures the prompt payment when due (whether at scheduled maturity, upon acceleration or otherwise) of any and all sums, indebtedness, obligations and liabilities of whatsoever nature, due or to become due, direct or indirect, absolute or contingent, joint or several, now or hereafter at any time owed or contracted by any Customer or any Debtor to Banc One Leasing and whether owing by any Customer or any Debtor alone or with one or more other customers, persons or other parties, and all costs and expenses of and incidental to collection of any of the foregoing, including reasonable attorneys' fees (all of the foregoing hereinafter called "Obligations"). It is Debtor's express intention that this Agreement and the continuing security interest granted hereby, in addition to covering all present Obligations of any Customer and/or any Debtor to Banc One Leasing, shall extend to all future Obligations of any Customer and any Debtor to Banc One Leasing, whether or not such Obligations are reduced or entirely extinguished and thereafter increased or are reincurred, and whether or not such Obligations are specifically contemplated by any Debtor and Banc One Leasing as of the date hereof. The absence of any reference to this Agreement in any documents, instruments or agreements evidencing or relating to any Obligations secured hereby shall not limit or be construed to limit the scope of this Agreement. 3. Location(s) of Collateral. The Collateral will be kept at the location(s) set forth in EXHIBIT B attached hereto ("Location"). 4. Representations, Warranties and Covenants. Debtor represents, warrants, covenants and agrees as follows: (a) Debtor is and will continue to be (or, with respect to after acquired property, will be when acquired), the legal and beneficial owner of the Collateral free and clear of any lien, security interest, mortgage, charge or encumbrance except for the security interest created by this Agreement and/or any Permitted Lien. "Permitted Lien" means any other security interest in any of the Collateral in favor of the Lienholder(s) that is/are identified on EXHIBIT C attached hereto and approved by Banc One Leasing. Except as may be related to a Permitted Lien, no effective Uniform Commercial Code ("UCC") financing statement or other instrument covering all or any part of the Collateral is on Page 1 of 6 8 [BANK 1 ONE LOGO] file in any recording office, except those in favor of Banc One Leasing; (b) Debtor will join with Banc One Leasing in executing such financing statements, security agreements, or other instruments in form satisfactory to Banc One Leasing upon Banc One Leasing's request and, in the event for any reason the law of any jurisdiction becomes or is applicable to the Collateral or any part thereof, or to any Obligation owed to Banc One Leasing, Debtor agrees to execute and deliver all such instruments and to do all of such other things as may be reasonably necessary or appropriate to preserve, protect and enforce the security interest and lien of Banc One Leasing under the law of such jurisdiction to the extent such security interest would be protected under that jurisdiction's UCC and will pay all expenses of filing and releasing same in all public offices wherever filing is deemed necessary or desired by Banc One Leasing; (c) The Collateral will not be attached or affixed to real estate in such a manner that it would become a fixture thereto or an accession to other goods without prior disclosure, notification to and approval by Banc One Leasing in addition in the execution of an owner/mortgagee/landlord release/waiver in favor of Banc One Leasing; (d) Debtor at its sole expense shall keep each item of Collateral insured against all risks of loss or damage from every cause whatsoever for an amount not less than the greater of the full replacement value or the original cost of acquiring such item of Collateral. Debtor at its sole expense shall carry public liability and property damage insurance in amounts satisfactory to Banc One Leasing protecting Debtor and Banc One Leasing from liabilities for injuries to persons and damage to property of others relating in any way to the Collateral. Debtor at its sole expense shall carry environmental risk insurance should any of the collateral include Hazardous Materials. All insurers shall be reasonably satisfactory to Banc One Leasing. Debtor shall deliver to Banc One Leasing satisfactory evidence of such coverage. Proceeds of any insurance covering damage or loss of the Collateral shall be payable to Banc One Leasing as loss payee and shall, at Banc One Leasing's option, be applied toward (a) the replacement, restoration or repair of the Collateral, or (b) payment of the obligations of Debtor under the Obligations. Proceeds of any public liability or property insurance shall be payable first to Banc One Leasing as additional insured to the extent of its liability, then to Debtor. Debtor hereby appoints Banc One Leasing as Debtor's attorney-in-fact with full power and authority in the place of Debtor and in the name of Debtor or Banc One Leasing to make claim for, receive payment of, and sign and endorse all documents, checks or drafts for loss or damage under any such policy. Each insurance policy will require that the insurer give Banc One Leasing at least 30 days prior written notice of any cancellation of such policy and will require that Banc One Leasing's interests be continued insured regardless of any act, error, omission, neglect or misrepresentation of Debtor. The insurance maintained by Debtor shall be primary without any right of contribution from insurance which may be maintained by Banc One Leasing. If Debtor does not keep the Collateral insured as required herein and/or fails to supply Banc One Leasing with evidence of that insurance, Banc One Leasing shall have the right, in its sole discretion, to obtain insurance in amounts sufficient to fully protect its interest, without notifying Debtor. Debtor agrees that Banc One Leasing shall have the right, in its sole discretion, to determine the manner in which Debtor shall reimburse Banc One Leasing for the premium for such insurance, including but not limited to (a) requiring Debtor to immediately reimburse Banc One Leasing for the premium and other costs it incurs or (b) adding that amount directly to the principal balance of any of the Obligations. Debtor will pay interest on any amount added to the principal balance at the highest rate set forth in any of such Obligation(s); (e) Debtor will pay promptly when due all taxes, assessments and governmental charges upon or against Debtor, the Collateral or the property or operations of Debtor, in each case before same becomes delinquent and before penalties accrue thereon, unless and to the extent that same are being contested in good faith by appropriate proceedings. At its option, Banc One Leasing may discharge taxes, liens or security interests or other encumbrances at any time placed on the Collateral and may pay for maintenance and preservation of the Collateral, all at Debtor's expense; (f) Debtor agrees it will, at its sole expense: (a) repair and maintain the Collateral in good condition and working order and supply and install all replacement parts or other devices when required to so maintain the Collateral or when required by applicable law or regulation, which parts or devices shall automatically become part of the Collateral; (b) use and operate the Collateral in a careful manner in the normal course of its business and only for the purposes for which it was designed in accordance with the manufacturer's warranty requirements, and comply with all laws and regulations relating to the Collateral, and obtain all permits or licenses necessary to install, use or operate the Collateral, and (c) make no alterations, additions, subtractions, upgrades or improvements to the Collateral without Banc One Leasing's prior written consent, but any such alterations, additions, upgrades or improvements shall automatically become part of the Collateral. The Collateral will not be used or located outside of the United States. (g) Debtor will, in the event of appropriation or taking of all or any part of the Collateral, give Banc One Leasing prompt written notice thereof. Banc One Leasing shall be entitled to receive directly, and Debtor shall promptly pay over to Banc One Leasing, any awards or other amounts payable with respect to such condemnation, requisition or other taking and in its sole discretion may apply the proceeds as it deems best without regard to whether an Event of Default has or has not occurred; (h) At least thirty (30) days prior to the occurrence of the event, Debtor will deliver to Banc One Leasing written notice of any addition change in Debtor's name, identity or legal structure; Page 2 of 6 9 (i) Debtor will defend the Collateral against all claims and demands of all persons at any time claiming the same or an interest therein; (j) Debtor will from time to time execute and deliver to Banc One Leasing such lists, descriptions and designations of Collateral as Banc One Leasing may require to identify the nature, extent and location of the Collateral; (k) Debtor is in material compliance with all Federal, State and local laws, statutes, ordinances, regulations, rulings and interpretations relating to industrial hygiene, public health or safety, environmental conditions, the protection of the environment, the release, discharge, emission or disposal to air, water, land or ground water, the withdrawal or use of ground water or the use, handling, disposal, treatment, storage or management of or exposure to Hazardous Materials ("Hazardous Materials Laws"), the violation of which would have a material effect on its business, its financial condition or the Collateral. The term "Hazardous Materials" means any flammable materials, explosives, radioactive materials, pollutants, toxic substances, hazardous water, hazardous materials, hazardous substances, polychlorinated biphenyls, asbestos, urea formaldehyde, petroleum (including its derivatives, by-products or other hydrocarbons) or related materials or other controlled, prohibited or regulated substances or materials, including, without limitation, any substances defined or listed as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "pollutants" or "toxic substances" under any Hazardous Materials Laws. Debtor has not received any written or oral communication or notice from any judicial or governmental entity nor is it aware of any investigation by any agency for any violation of any Hazardous Materials Law; (l) All representations, warranties, covenants and agreements set forth herein and all information furnished by Debtor concerning the Collateral or otherwise in connection with the Obligations, shall be at the time same is furnished, accurate, correct and complete in all material respects as of the date hereof, on the date upon which Debtor acquires any of the Collateral or any rights therein not presently acquired or existing and shall continue until the Obligations are paid in full. 5. Appointment of Attorney-in-Fact. Debtor hereby irrevocably appoints Banc One Leasing or its designee as Debtor's attorney in fact, with full authority in the place instead of Debtor, from time to time in Banc One Leasing's discretion prior to, upon, during, and after an Event of Default, to take any action and to execute any instrument which Banc One Leasing may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation, (a) to perfect and continue to perfect the security interests created by this Agreement; (b) to ask, demand, collect or sue for, recover, compound, receive and give acquittance in receipts for any monies due or become due under or in respect for any Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper, in connection with the Collateral; and (d) to file any claims or take any action or institute any proceeding which Banc One Leasing may deem necessary or desirable for the collection of any Collateral or otherwise to enforce the rights of Banc One Leasing in the Collateral. 6. Events of Default. The following events shall be "Events of Default" under this Agreement: (a) default by Debtor in performance of any covenant or agreement herein; (b) any warranty, representation or statement made or furnished to Banc One Leasing by or on behalf of Debtor in connection with this Agreement or to induce Banc One Leasing to make a loan or extend other credit to Debtor, proving to have been false in any material respect when made or furnished; (c) default by Debtor or any other obligor in performance of any covenant or agreement contained in any Obligation; (d) default by Debtor or any other obligor in performance of any covenant or agreement contained in any letter or agreement executed in conjunction with any Obligation; (e) death, dissolution, termination of existence, insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Debtor or any guarantor or surety for Debtor; (f) any uninsured loss, theft, damage or destruction of the Collateral; (g) the making of any levy, seizure or attachment of any Collateral; (h) refusal to surrender the Collateral as herein above provided; or (i) if Banc One Leasing shall for any reason deem itself insecure as to the prospect of payment of any Obligation. 7. Rights upon Default. If any Event of Default shall occur, then. (a) Banc One Leasing may, at its option and without notice, declare the unpaid balance of any or all of the Obligations immediately due and payable and this Agreement and any or all of the Obligations in default; (b) All payments received by Debtor under or in connection with any of the Collateral shall be held by Debtor in trust for Banc One Leasing, shall be segregated from other funds of Debtor and shall forthwith upon receipt by Debtor be turned over to Banc One Leasing in the same form as received by Debtor (duly endorsed by Debtor to Banc One Leasing, if required). Any and all such payments so received by Banc One Leasing (whether from Debtor or otherwise) may, in the sole discretion of Banc One Leasing, be held by Banc One Leasing, of then or at any time thereafter be applied in whole or in part by Banc One Leasing against, all or any part of the Obligations in such order as Banc One Leasing may elect; Page 3 of 6 10 (c) Banc One Leasing shall have the rights and remedies of a secured party under this Agreement, under any other instrument or agreement securing, evidencing or relating to the Obligations and under the UCC as adopted in the state where Banc One Leasing's principal office is located or other applicable laws. Without limiting the generality of the foregoing, Banc One Leasing shall have the right to take possession of the Collateral in full or in part and for that purpose Banc One Leasing may enter upon any premises on which the Collateral may be situated and remove the Collateral therefrom; (d) Without demand of performance or other demand, advertisement or notice of any kind (except the notice(s) specified below regarding the time and place of public sale or disposition or time after which a private sale or disposition is to occur) to Debtor, any Obligor or any other person or entity (all and each of which demands, advertisement and/or notices are hereby expressly waived), Banc One Leasing may forthwith collect, receive, appropriate and realize upon the Collateral, in full or in any part thereof, may abandon, not claim or not take possession of any Collateral, and/or may forthwith sell, lease, assign, give an option or options to purchase or sell or otherwise dispose of and deliver the Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale(s) at any of Banc One Leasing's offices or elsewhere at such price(s) as Banc One Leasing may determine, for cash or credit or for future delivery without assumption of any credit risk. Banc One Leasing shall have the right upon any public sale(s), and, to the extent permitted by law, upon any such private sale(s), to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption of Debtor; (e) Debtor, at Banc One Leasing's request, will assemble the Collateral and make it available to Banc One Leasing at such place(s) as Banc One Leasing may reasonably select, whether at Debtor's place(s) of business and/or the Location of Collateral or elsewhere. Debtor further agrees to allow Banc One Leasing to use or occupy Debtor's place(s) of business and/or Location of Collateral, without charge, for the purpose of effecting Banc One Leasing's remedies in respect to the Collateral; (f) Banc One Leasing shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any or all of the Collateral or in any way relating to the rights of Banc One Leasing hereunder, including attorney's fees and legal expenses, to the payment in whole or part of the Obligations, in such order as Banc One Leasing may elect, and only after or applying over such net proceeds and after the payment by Banc One Leasing of any other amount required by any provision of law, need Banc One Leasing account for the surplus, if any, to Debtor; (g) To the extent permitted by applicable law, Debtor waives all claims, damages and demands against Banc One Leasing arising out of the repossession, retention, sale or disposition of the Collateral; (h) Debtor agrees that Banc One Leasing need not give more than ten (10) calendar days' notice, addressed to Debtor at Debtor's mailing address set forth above, of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters; and (i) Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Banc One Leasing is entitled. 8. Processing of Collateral After an Event of Default. Debtor hereby agrees that Banc One Leasing or its designee may do whatever Banc One Leasing in its sole discretion deems to be commercially reasonable to prepare any Collateral for disposition and to dispose of any Collateral, including without limitation operating any of Debtor's manufacturing or other processes relating to the Collateral and using patents, copyrights, trademarks, trade names, trade secrets, rights under manufacturer's warranties, and the like relating to or affecting such processes or the Collateral and disposition thereof, and that Debtor shall not do anything which would restrict Banc One Leasing's right so to act. Banc One Leasing may transfer Collateral into its name or that of a nominee and receive the dividends, royalties or income thereof. Banc One Leasing shall have no duty as to the collection or protection of the Collateral or any income therefrom, nor as the preservation of rights against prior parties, not as to the preservation of any right pertaining thereto. 9. Construction of Rights and Remedies and Waiver of Notice and Consent. Unless otherwise expressly provided herein, (a) any right or remedy of Banc One Leasing may be pursued without notice to or further consent of Debtor, both of which Debtor hereby expressly waives; (b) each right or remedy is distinct from but cumulative to each other right or remedy and may be exercised independently or concurrently with, or successively to any other right and remedy; (c) no extension(s) of time and/or modification(s) or amortization of any Obligation shall release the liability of or bar the availability of any right or remedy against Debtor, and Banc One Leasing shall not be required to commence proceedings against Debtor or to extend time for payment or otherwise to modify amortization of any Obligation, and (d) Banc One Leasing has the right to proceed at its election against any or all of the Collateral, against all such property together or against any items thereof from time to time, and not action against any item(s) of property shall bar subsequent actions against any other item(s) of property. Page 4 of 6 11 10. Extensions and Compromises. With respect to any Collateral or any Obligation, Debtor assents to all extensions or postponements to the time of payment thereof or any other indulgence in connection therewith, to each substitution, exchange or release of Collateral, to the release of any party primarily or secondarily liable, to the acceptance of partial payment thereof or to the settlement or compromise thereof, all in such matter and such time or times as Banc One Leasing may deem advisable. No forbearance in exercising any right or remedy on any one or more occasions shall operate as a waiver thereof on any future occasion; and no single or partial exercise of any right or remedy shall preclude any other exercise thereof or the exercise of any other right or remedy. 11. Indemnity and Expenses (a) Debtor agrees to indemnify Banc One Leasing from any and all claims, losses and liabilities growing out of or resulting from this Agreement; (b) Debtor will upon demand pay or reimburse Banc One Leasing, as the case may be, the amount of any and all expenses, including fees and disbursements of counsel, experts and agents, which Banc One Leasing may incur in connection with, (i) the administration of this Agreement; (ii) the custody, preservation, use or operation of, or the sale of, collections from, or other realization upon my Collateral; (iii) the exercise or enforcement of any of the nights of Banc One Leasing hereunder, or (iv) the failure by Debtor to perform or observe any of the provisions hereof. Upon Debtor's failure to promptly pay any said amount, Banc One Leasing may add said amount to the principal amount owed on any Obligation and charge interest on the same at the rate of interest as set forth in said Obligation; (c) Debtor shall fully and promptly pay, perform, discharge, defend, indemnify and hold harmless Banc One Leasing from any and all claims, orders, demands, causes of notion, proceedings, judgments, or suits and all liabilities, losses, costs or expenses (including, without limitation, technical consultant fees, court costs, expenses paid to third parties and reasonable legal fees) and damages arising out of, or as a result of (i) any release, discharge, deposit, dump, spill, leak or placement of any Hazardous Material into or on any Collateral or property owned, leased rented or used by Debtor (the "Property") at any time; (ii) any contamination of the soil or ground water of the Property or damage to the environment and natural resources of the Property or the result of actions whether arising under any Hazardous Materials Law, or common law; or (iii) any toxic, explosive or otherwise dangerous Hazardous Materials which have been buried beneath or concealed with the Property. The indemnities set forth in this paragraph shall survive termination of this Agreement and shall be effective for the full dollar amount of any said cost, expense, etc., regardless of the actual dollar amount of any Obligation(s). 12. Miscellaneous. (a) Any notice, statement, request, demand, consent, or other document required to be given hereunder (any of which may be referred to as "notice") by either party shall be in writing and shall be delivered personally or by certified or registered mail, postage prepaid, return receipt requested, to the last known address of said party. When personally delivered, any notice shall be deemed given when actually received. Except as otherwise provided herein, a notice shall be deemed given when mailed. Any mailed notice given pursuant to this section shall be deemed reasonable and shall be effective, regardless of whether actually received. (b) This Agreement shall be construed and interpreted under the laws of the State of Ohio. (c) This Agreement shall be binding upon Debtor, Debtor's personal representatives, heirs, successors and assigns, as the case may be, and shall be binding upon the inure to the benefit of Banc One Leasing and its successors and assigns. Debtor cannot assign this Agreement. (d) The Agreement may be amended, but only by a written amendment signed by Banc One Leasing and Debtor. (e) If any provisions of this Agreement or the application of any provision to any party or circumstance shall, to any extent, be adjudged invalid or unenforceable, the application of the remainder of such provision to such party or circumstance, the application of such provision to other parties or circumstances, and the application of the remainder of this Agreement shall not be affected thereby. (f) The headings contained in this Agreement have been inserted for convenience of reference only and are not to be used to interpreting this Agreement. (g) Where appropriate, the number of all words in this Agreement shall be both singular and plural, and the gender of all pronouns shall be masculine, feminine, neuter, or any combination thereof. (h) A carbon, photographic or other reproduction of this Agreement or a financing statement shall be sufficient as a financing statement and may be filed as such whenever necessary or desirable, in Banc One Leasing's opinion, to perfect the security interest granted by this Agreement. (i) Banc One Leasing may correct patent errors herein, may fill in any blank spaces herein and may date this Agreement. (j) If more than one signer executes this instrument, the word "Debtor" as used herein shall be deemed to include all such signers, and all of the warranties, representations, covenants and obligations hereof shall be joint and several of and for all such signers. (k) This Agreement shall take effect when signed by Debtor. (l) Time is of the essence of all requirements of Debtor hereunder. Page 5 of 6 12 [BANK 1 ONE. LOGO] ALL PARTIES TO THIS AGREEMENT, INCLUDING DEBTOR AND BANC ONE LEASING, IRREVOCABLY CONSENT TO THE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT IN FRANKLIN COUNTY, OHIO, AND WAIVE ALL RIGHTS TO TRIAL BY JURY, IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY ON ANY MATTER WHATSOEVER ARISING OUT OF, IN CONNECTION WITH OR IN ANY WAY RELATED TO THIS AGREEMENT. THE TRIZETTO GROUP, INC. (Debtor) By: /s/ MJ SUNDERLAND ------------------------------ Title: Sr. VP, CFO --------------------------- Witness: ------------------------- Address: ------------------------- ------------------------- Accepted and Agreed to: BANC ONE LEASING CORPORATION By: ------------------------------ Title: --------------------------- Page 6 of 6 13 [BANK 1 ONE. LOGO] EXHIBIT A Description of Collateral All of the property of THE TRIZETTO GROUP, INC. ("Debtor") described below, now or at any time hereafter owned or acquired by Debtor, wherever located, whether in possession of Debtor, warehousemen, bailees or any other person and whether located on Debtor's premises or elsewhere and all replacements, substitutions, attachments, accessions and additions to any such property of Debtor together with all Proceeds (all of the foregoing referred to, collectively, as the "Collateral"). "Proceeds" shall mean whatever is received or receivable when any of the Collateral is (or proceeds thereof are) sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including, without limitation, (a) all cash and non-cash proceeds and products of any of the foregoing, including all monies and deposit accounts, and (b) all accounts, chattel paper, instruments, general intangibles and rights to payment of every kind now or at any time hereafter arising out of any such sale, lease, collection, exchange or other disposition of any of the foregoing. 1. All equipment, tools, machinery, furnishings, furniture, and other goods and fixtures (and all manufacturer's manuals and maintenance books and records relating to any of the foregoing) and all improvements, replacements, substitutions, attachments, accessions and additions thereto. 2. All accounts, general intangibles, chattel paper, instruments, and other forms of obligations and receivables, and all books and records of Debtor relating to any of the foregoing. Page 1 of 1 14 [BANK 1 ONE. LOGO] EXHIBIT B Permitted Locations of Collateral The Trizetto Group, Inc. 569 San Nicolas Drive Suite 360 Newport Beach, CA 92660 Page 1 of 1 15 [BANK 1 ONE. LOGO] EXHIBIT C Permitted Liens on Collateral Bank One, Colorado, NA Corporate Lending -- Boulder 1125 17th Street Denver, CO 80217 Page 1 of 1 EX-21.1 6 CURRENT SUBSIDIARIES OF TRIZETTO 1 EXHIBIT 21.1 SUBSIDIARIES OF THE TRIZETTO GROUP, INC.
STATE OR OTHER JURISDICTION OF ENTITY NAME INCORPORATION - -------------------------------------------------------- --------------- Creative Business Solutions, Inc. Texas Finserv Health Care Systems, Inc. New York Healthcare Media Enterprises, Inc. Delaware - Healthcare Media Private Ltd. India HealthWeb, Inc. Delaware Margolis Health Enterprises, Inc. California Novalis Corporation Delaware - Digital Insurance Systems Corporation Ohio - Health Networks of America, Inc. Maryland - Novalis Development Corporation Delaware - Novalis Development & Licensing Corporation Indiana - Novalis Services Corporation Delaware TriZetto Application Services, Inc. (f/k/a Croghan & Associates, Inc.) Colorado
EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 of The Trizetto Group, Inc. of our report dated February 16, 2000 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP San Jose, California March 30, 2000 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 18,849 5,957 8,825 (597) 0 35,275 12,202 1,405 68,418 14,394 0 0 0 20 51,276 68,418 0 32,926 0 26,808 14,529 0 256 (8,140) (213) (7,927) 0 0 0 (7,927) ($0.85) ($0.85)
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